Measurement is a very basic concept in accounting because it is the very basic foundation of accounting system.
The concept of measurement in accounting is used to describe and to explain how and in what manner the financial transactions have been recorded in the books of accounts.
Measurement in accounting is an important aspect. All transactions and events are measured in terms of money. These concepts include “cost”, “earnings”, “revenue”, “profit”, and “return on equity”.
A measurement discipline deals with identifying objects and events to be measured, selecting standards or scales to be used, and evaluating dimensions of measurement standards or scales.
Prof. R.J. Chambers has defined measurement as ‘assignment of numbers to objects and events according to rules specifying the property to be measured, the scale to be used and the dimension of the unit.’
As per the above definition, there are three elements of measurement i.e.
- Identification of objects and events to be measured
- Selection of standard or scale to be used
- Evaluation of dimension of measurement standard or scale
Now we shall discuss these elements in detail:
Objects or Events to be Measured
Accounting is the process of identifying, measuring and communicating economic information to enable judgment and decisions by the users of the financial statements. Decision-makers require past, present and future information. Hence, measurement is vital in serving their needs.
The point worth noting here is that past and current items and events may be measured with some degree of accuracy, but future happenings can only be anticipated. Prediction is also a key aspect of accounting information. Decision-makers need to make decisions regarding the unseen future which can be helped by accounting measurement.
Standard of Measurement
Money is the standard unit of measurement in accounting, although now a day’s quantitative information is also being supplied along with monetary information.
Money as a measurement scale has no universal denomination. It takes the shape of currency ruling in the country. For example, in Australia measurement scale is the Australian Dollar, in India Rupees (`), in the USA Dollar ($) and so on.
Suppose a businessman in India took a loan of $5000 from the USA; he would have to record this transaction in terms of rupees in his books of account. Let the exchange rate be 1$= ₹60. The loan amount will be entered for Rs. 300000 in the books of account.
Further, the rate of exchange changes to 1$= ₹65 on the closing day of the books of account. The amount of loan to be shown on the balance sheet as of closing day will be 325000. Hence, money as the unit of measurement has no universal application. As the rate of exchange fluctuates, money as a measurement scale also becomes volatile.
An ideal measurement scale must be stable over time. For example, if a person buys 1 kg of Potatoes today, the quantity will be the same if he buys 1 kg potatoes one year later. Similarly, the length of one meter of cloth will be the same one year later.
But if we see money as a measurement unit, it keeps on changing. It is affected by many factors like exchange rate fluctuation, interest rate, inflation, etc. hence;, we cannot call it an ideal unit of measurement. The full accounting is based on this.
Evaluation of Measurement Standard
We have been previously mentioned that accounting is supposed to create information relevant to users’ expectations. Measurement is a key aspect of the accounting profession.
As a measuring discipline, accounting data is measured in terms of money solely. Quantitative information is also being offered in many circumstances, although such information is supplementary only to monetary information.
We measure our income, and assets in the most practical and common way – with money. To find the income of any individual, we have to measure the salary that he gets each month, we have to measure the amount of money we save each month. We measure the assets of the company with the money that the shareholders pay for it. To find the amount of money that a corporation spends on advertising, we also have to measure it with the money that it pays for the advertising.
What is important for us to remember is that we use money to find the values of all the other things that we have. We measure these things with money because money is the most common and practical way to measure them. In accounting, we measure different things in terms of money. For example, we can measure the amount of a transaction in terms of the money that is paid for it. We measure income in terms of the money that is received for it. We measure the value of the products of a company in terms of the amount of money that they sell it for.