Essay: Accounting Measurement Concepts

Essay: Accounting Measurement Concepts
April 11, 2011 Comments Off on Essay: Accounting Measurement Concepts Academic Papers on Business Studies,Sample Academic Papers admin

Sample Essay

The measurement of accounting information is defined by Barron’s educational series (2005) as the “Quantification of accounting values in the form of money or other units”. In accounting practices, transactions are normally documented in dollars amounts, based on historical cost (Barron’s Educational Series, 2005).

However, some companies measure the accounting information in volume like direct labor hours under the historical cost accounting system (Barron’s Educational Series, 2005). In accounting, there have been many theories presented by the experts to deal with the accounting measurement problems, to make the process of recording more convenient and to present the business information more accurately (Nobes, 1992). These theories are normative in the sense that they guide accountant about recording the accounting information and shape the accounting behavior (Nobes, 1992). Researchers have not yet presented a universal theory that can satisfy all the concerned stakeholders like investor, manager and government bodies. The choice of a particular theory depends upon the two fundamental business valuation methods are the present value of whole business which is a forward looking approach and valuation on the basis of assets which is further divided into historical cost view and current value view (Nobes, 1992).

Historical Cost Method

According to the historical cost concept, assets should be valued on the bases of price paid at the time of purchase and the inflation and exchange rate fluctuations in the useful life of asset should be ignored. The historical-cost method has been most widely used for assets valuation and is also approved in the United States under the accounting system of Generally Accepted Accounting Principles (GAAP) (Farlex, Inc., 2009). It is based on the stability assumption which means that the value of currency will remain stable which is almost unrealistic. Historical cost method is also used for the calculation of net income in the income statement. As a result, value of inventory is recorded on the lower cost which artificially inflates the profits of the company (Riahi-Belkaoui, 2005). For calculating the net profit under the historical cost concept, matching principle is used which states that expenses of business operations should be matched against the revenues earned and should also be recorded in the same period when recognized (Nobes, 1992). Another fundamental aspect of this idea is that company is assumed to be a going concern and assets are not bought for the profit making purpose so they should be recorded on the historical value (Nobes, 1992). In the historical cost method, the value of dollar is assumed to be nominal which means that it is not adjusted for inflation (Nobes, 1992).

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