What Is Accounting Measurement

Accounting Measurement To make an accounting measurement, the accountant must answer four basic questions:

  • What is measured?
  • When should the measurement be made?
  • What value should be placed on what is measured?
  • How should what is measured be classified?

Accountants debate the answers to these questions constantly, and the answers change as new knowledge and practice require. But the basis of today’s accounting practice rests on a number of widely accepted concepts and conventions. We begin by focusing on the first question: What is measured? We discuss the other three questions in the next chapter. Business transactions Business transactions are economic events that affect a business’s financial position.

Businesses can have hundreds or even thousands of transactions every day. These transactions are the raw material of accounting reports. A transaction can be an exchange of value (a purchase, sale, payment, collection, or loan) between two or more parties. A transaction also can be an economic event that does not involve an exchange. Some examples of nonexchange transactions are losses from fire, flood, explosion, and theft; physical wear and tear on machinery and equipment; and the day-by-day accumulation of interest. To be recorded, a transaction must relate directly to a business entity. Suppose a customer buys toothpaste from CVS but buys shampoo from a competing store because CVS is out of shampoo. The transaction in which the toothpaste was sold is entered in CVS’s records. However, the purchase of the shampoo is not entered in CVS’s records because, even though it indirectly affects CVS economically (by losing a sale), it does not involve a direct exchange of value between CVS and the customer.

Money Measure All business transactions are recorded in terms of money. This concept is called money measure. Of course, nonfinancial information may also be recorded, but a business’s transactions and activities are measured through the recording of monetary amounts. Money is the only factor common to all business transactions, and thus it is the only unit of measure capable of producing financial data that can be compared. The monetary unit a business uses depends on the country in which the business resides. For example, in the United States, the basic unit of money is the dollar. In China, it is the yuan; in Japan, the yen; in the European Union (EU).

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