In Section VIII of this book we have sought to explain the operating debit for depreciation and obsolescence in the accounts of business enterprises and we have been at pains to underline the contention that the economic concept of such provision requires the building up of funds which will so point to the conservation of resources as to enable items of fixed equipment to be readily replaced, without recourse to new borrowing, by the time they are worn out or obsolete. The measurement of these replacement funds involves the consideration of at least two issues.

The first is associated with the economic dimension of operating surplus and is thereby concerned with the temporal allocations attributable to current operations. We have seen that conventional accounting measures these allocations by reference to the original costs of fixed assets, as related to time periods of effective user. A strict application of this method requires that each asset should be treated separately, which means that the accounting provision which finds its way to the debit of profit-and-loss account is constituted by a summation of the allocations as arithmetically calculated for individual assets. For the economic purposes of social accounts we need to reset this provision for charge to operating account in terms of current replacement costs. This too will mean a resetting for each individual asset. The total of such replacement cost allocations attributable to the relevant accounting period will constitute the economic provision for depreciation and obsolescence to be included with the payables in the operating section of the profit-and-loss account.

The second issue gives rise to problems which are concerned with adjustments intended to cover the inadequacy or otherwise of accumulating replacement fund totals when judged in the light of replacement costs at the close of the particular accounting period under survey. It is plain that while the current economic provision is a sufficient replacement carry for attribution to the operating account of the current accounting period, the store of back provisions accumulating in the fund may be out of line unless brought up to date by some adjusting reservation.