of Measurement:-- Measurement is important aspect of accounting.
Transaction and Events are measured in term of money.
There are three basic elements of
1. Identification of Objects and
Events to be measured.
2. Selection of Standard or scale to
3. Evaluation of dimension of
measurement standard or scale. in accounting we take money as a unit of
There are four measurement base or
1. Historical Cost
2. Current Cost
3. Realizable Value
4. Present Value
Historical Cost :- It means acquisition
price or purchase price. For example, Rs.7,00,000/- paid to purchase the
machine, here historical cost of machine is Rs.7,00,000/-.Under this principle,
assets are valued at an amount paid or fair market value at the time of
Accordingly Liabilities are recorded at the amount of the proceeds
received in exchange for the
obligation. Liability is recorded at the amount of proceeds received in
exchange for an obligation.
Current Cost :- Assets are recorded at the amount of cash or cash
equivalents that would have to be paid if the same or an equivalent asset has
been acquired currently. Liabilities are carried at the undiscounted amount of
cash or cash equivalents that would be required to be settle the obligation
Realizable(settlement) value :- Under this principle, Assets are
recorded or valued at amount which can be obtained if assets are sold in open
market. Liabilities are carried at their settlement values; i.e. the discounted
amounts of cash or cash equivalents expressed to be paid to satisfy the
liabilities in the normal course of business.
Under this principle, Assets are recorded at present discounted value of future
net cash inflows that is expected to generate in the normal course of business.
-Liabilities are recorded at present
discounted value of future net cash outflows which are expected to be paid to
settle liabilities in normal course of business.
and valuation :- Value relates to benefit to be derived from objects, abilities or idea.
According to economist, value is the utility (i.e. satisfaction) of economic
resources to the person using it. According to accountant, value of objects,
abilities or ideas is always measured in term of money.
Transaction is measured at the amount which is paid for or by applying
valuation principle. But there are some assets and liabilities which are not
occurred or can not be measured by applying valuation principle like
depreciation, provision for doubtful debts. But these assets or liabilities are
necessary to record in books of accounts but for recording these items we need
some value and for withdrawing such value we make reasonable estimates based on
existing situation and past experience. Thus management makes various estimates
and assumption of assets, liabilities, income and expenses as on the date of
preparation of financial statement like depreciation, amortization of expenses,
provisions of employee benefits etc.
Process of estimation
involves judgments based on information available.
-Estimate requires revision if changes
occur regarding circumstances on which the estimate was based. Change in
estimates means difference arises between certain parameters estimated earlier
and re-estimated during the current period or actual results achieved during