Accounting and measurement is a detailed topic. It is important to understand the meaning of accounting and its importance. Accounting is the systematic and comprehensive recording of financial transactions taking place in a business. It measures the performance of the business by measuring its profit or loss. Money is a measurement value of accounting and Measurement is an essential part of accounting. Therefore all the measurement in Accounting are done in monetary term
Overview of Accounting and Measurement
Accounting is the most important part to run a business as it gives a clear presentation of what is happening in the business. Accounting and management also help the decision making the process, policy formation, controlling and planning.
It helps in choosing the correct alternative which will benefit the business. It is used to measure the economic posting and economic performance of the company. Its working measurement principle is fair value approach.
What is Accounting?
Accounting is a process of collecting summarizing, analyzing and reporting the transactions to calculate profit or loss and regulate tax collection entities. It is one of the key functions of any business. An accountant must handle the books of accounts at a small firm, or by sizable finance departments with dozens of employees at larger companies.
Generally Accepted Accounting Principles
Accountants use generally accepted accounting principles(GAAP) while preparing financial statements. GAAP is a set of standards related to balance sheet identification, outstanding share measurements, and other accounting issues, and its standards are based on double entry system accounting. Thus it is a method which enters each expense or incoming revenue in two places on a company’s balance sheet.
Example of Double Entry Accounting
Example of double-entry accounting: Suppose a company, ABC, transfers an amount of Rs. 10,000 into its very own bank account. With this, there will be changes in two major asset account of the company and they are:
Debit in Bank Account – Rs. 10,000
Cash in Credit Account – Rs. 10,000
Here is another theory
Suppose company ABC sets to buys any sort of goods and does it on a credit of Rs. 25,000. The whole transaction will include two major changes in assets as well as liabilities.
Account Asset Debit Purchase – Rs. 25,000
Account Credit – Rs. 25,000
Set of methods and techniques to identify and collect economic information system of measuring and communicating the processing of data to generate information allows making correct, rational and effective decisions in the management of an organization.
What are Accounting and Measurement?
Accounting measurement is the calculation of economic or financial activities in terms of money, hours or other units. Overall, accounting measurement is more than just an element that helps with comparing and evaluation of data in accounting.
Accounting information provides useful measures of performance and financial position. Therefore it needs to provide information about value: the value of an entire business, the value of assets and liabilities, etc.
Principles of Accounting Measurement
Accounting measurement runs on certain principles. There are basic principles :
Objectivity: The principle of objectivity is one of the most important and pervasive principles of accounting measurement. It states that financial accounting information must be verifiable and reliable. It requires that values of transactions and of the assets and liabilities to objectively determined and backed by documented evidence.
Although it ensures that the dollar amounts disclosed in the financial statements are reasonably reliable. The principle of objectivity also precludes much relevant and useful information from ever appearing on the financial statements.
Matching: The matching principle states that the efforts of a given period must match against the benefits that result from the matching principle. Whenever a company incurs a cost to generate benefits, normally in the form of revenues initiated by it.
If the revenues are generated immediately, then the cost is treated as an expense appearing on the income statement of the current period. If the revenues are expected to be realized in future periods, the cost is considered an asset, or capitalized, and appears on the balance sheet.
Revenue recognition: The principle of revenue recognition determines at which of the four points i.e. (1) ordered, (2) produced, (3) transferred to the buyer, and then (4) paid for by the buyer.
Consistency: The principle of consistency states that, although there is a considerable choice among methods, companies should choose a set of methods and use them from one period to the next.
Its primary economic rationale is that consistency helps investors, creditors, and other interested parties to compare measures of performance and financial position across time periods.
Breaking Down ‘Accounting and Measurement’
Accounting measures the performance of the business entity. Alternative units, number of labor hours and the number of jobs created are its measures. Different accounting measurements help to determine the overall position of the corporation.
What is Measurement?
Measurement is related to valuation and recording and is a process of collecting various figures and information in the process of accounting measurement. The measurement has become a subject of research since the nineteenth century. Ever since measurement of accounting is multidimensional. Accounting and measurements differently interpret values and measurements.
Example of Accounting and Measurement
Two business entities are having sales of Rs.100,000. Entity A may achieve this with two salespeople and entity B may achieve it with ten . Therefore, consequently, entity A’s sales team is much more productive, bringing in Rs.50,000 per salesperson per week. \Whereas only Rs.10,000 per salesperson per week for entity B.
On the other hand, if entity A has a total of 200 employees, and entity B has a total of 100, then entity A is achieving only Rs.500 per employee (Rs.100,000/200 and entity B is achieving Rs.1000 per employee (Rs.1,00,000/100). Hence, this might suggest that entity A has too much administrative overhead or that entity B runs a very efficient operation.
Solved Questions for You
Question: What are the bases and methods of tracing in accounting?
Answer: The recording of financial statements and transaction are the bases of accounting. Furthermore, the two ways to track expense and income in accounting is Cash Basis and Accrual Basis. Hence, both of it can also be used depending on their respective range.