In this paper, we quantify and discuss the physical and surface chemical processes leading to the formation, temporal evolution and sedimentation of dust grains in brown dwarf and giant gas planet atmospheres: nucleation, growth, evaporation and gravitational settling. Considering dust particles of arbitrary sizes in the different hydrodynamical regimes (free molecular flow, laminar flow, turbulent flow), we evaluate the equilibrium drift velocities (final fall speeds) and the growth rates of the particles due to accretion of molecules. We show that a depth-dependent maximum size of the order of a_max ~ 1 mum (upper regions) ... 100 mum (lower regions) exists, which depends on the condensate and the stellar parameters, beyond which gravitational settling is faster than growth. Larger particles can probably not be formed and sustained in brown dwarf atmospheres. We furthermore argue that the acceleration towards equilibrium drift is always very fast and that the temperature increase of the grains due to the release of latent heat during the growth process is negligible. Based on these findings, we formulate the problem of dust formation coupled to the local element depletion/enrichment of the gas in brown dwarf atmospheres by means of a system of partial differential equations. These equations state an extension of the moment method developed by Gail Sedlmayr (1988) with an additional advective term to account for the effect of size-dependent drift velocities of the grains. A dimensionless analysis of the new equations reveals a hierarchy of nucleation -> growth -> drift -> evaporation, which characterises the life cycle of dust grains in brown dwarf atmospheres. The developed moment equations can be included into hydrodynamics or classical stellar atmosphere models. Applications of this description will be presented in a forthcoming paper of this series.