Measurement in accounting is an important aspect. All transactions and events are measured in terms of money. A measurement discipline deals with the identification of objects and events to be measured, selection of standards or scale to be used, and evaluation of dimension of measurement standard or scale.
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
As 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 present objects and events can be measured with some degree of accuracy but future events can only be predicated. Prediction is also an essential part of the accounting information. Decision-makers need to make decisions about the unseen future which can be served by accounting measurement.
Standard of Measurement
Money is the common 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 $5000 from the USA, he would have to record this transaction in terms of rupees in his books of account. Let the exchange rate was 1$= ` 60. The loan amount will be entered for Rs. 300000 in books of account. Further the rate of exchange changes to 1$= ` 65 on the closing day of 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 and inflation etc. hence, we cannot call it an ideal unit of measurement in fact whole accounting is based on this.
Evaluation of Measurement Standard
We have been already discussed that accounting is meant to generate information suitable to user’s requirements. Measurement is an important part of the accounting discipline. As a measurement discipline, accounting data is measured in terms of money only. Quantitative information is also being supplied in many cases but such information is supplementary only to monetary information.