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Why is depreciation added back into the Net Capital Spending formula? Net Capital Spending= Ending of...

Why is depreciation added back into the Net Capital Spending formula?

Net Capital Spending= Ending of net fixed assets- beginning of net fixed assets+ depreciation

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Answer #1

Net capital spending means the overall capital which has been spended by company in acquisition of the fixed asset during a particular period of time and it represents the high capital expenditure at the time of the expansion of the company.

Depreciation means fall in the value of the Asset due to wear and tear.

Depreciation on the fixed asset is added back to the overall formula because depreciation has already been deducted on the closing capital of the fixed assets so, deduction of depreciation would be meaning that the effect would be twice in nature, so it is added back in order tto keep it to normal

Hence depreciation in added back is this formula like-

Net capital spending=(closing Net fixed asset-beginning net fixed asset+depreciation)

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