Measurement systems

Measurement Systems

Measurement systems underpin not only profit, but also asset valuation. Essentially, a measurement system is the way in which the elements in the accounts are valued. Traditionally, historical cost has been accepted measurement system. Incomes, Expenses, Assets and liabilities have been recorded  in the accounting system at cost at the time that they were first recognized. Unfortunately, historical cost, although easy to use, has several limitations; for example, it does not take inflation into account. However, although the limitation of historical costs  accounting are well known, accountants have been unable to agree on any of the main alternatives such as current purchasing power, replacement cost, realizable value or present value.

Overview

Measurement systems are the processes by which the monetary amounts of items in the financial statement are determined. These systems are fundamental to the determination of the profit and to the measurement of net assets. In essence, The measurement system determines the values obtained. Potentially,

Major Measurement Systems

  1. Historical Cost Systems

    1. Historical Cost ( Monetary amounts recorded at the date of original transaction )
    2. Current Purchasing Power (Historical cost adjusted by general changes in purchasing power of money )
  2. Current Value Systems

    1. Replacement Costs ( Assets valued at the amounts needed to replace them with an equivalent asset )
    2. Realizable Value ( Assets valued at the amounts they would fetch in an orderly sale )
    3. Present Value ( Assets valued at the discounted present values of future cash inflows )

To read more: Historical Cost vs Replacement CostHistorical Cost Valuation in Real Life