For running a business, it is necessary to carry out the accounting process. Without proper accounting, no business can start and operate, as knowing a business's economic state and position is vital. And all this is possible with the correct accounting measurement. But are you acquainted with the meaning of the term accounting measurement?

In layman’s terms, we can define accounting measurement as the way to measure accounting. And you can do measurements in several terms. Accounting measurement is more than this, but you must know what accounting is before knowing more about it. So, let's start the article with the meaning of accounting, and then we will comprehend accounting measurement, its principles, etc.

What Does Accounting Mean?

Accounting is a business's fundamental element and the process of collecting, analyzing, summarizing, and reporting transactions. It is a critical process as it helps to calculate a business's profit and loss and also handles the entities of tax collection. Accountants carry out the accounting process based on GAAP principles, abbreviated as Generally Accepted Accounting Principles.

GAAP refers to the pre-defined rules and regulations for carrying out different accounting processes subjected to the double-entry accounting system.

Surely, now you have a clear idea of accounting, let's move on to the accounting measurement definition.

What Is Accounting Measurement

Accounting measurement refers to the business's financial and economic activities in terms of money. However, you can also do accounting measurements in several other parameters, including the number of working hours, the number of job creations, and a few others. It helps to evaluate and compare the data in accounting.

Every accounting measure gives a different insight into the overall state of a business. By implementing diverse accounting measurements, you can get a comprehensive outlook of your business's or company's operations and compare it to others.

Accounting Measurement Example

To have a better understanding of what accounting measurement is, let's have a look at an example.

For example, there are two business entities with the same sales but with a different numbers of laborers. Business entity X had sales of $100,000 with four laborers, and entity Y had the same sales as X, i.e., $100,000 but with eight laborers. Comparing both entities, we can evaluate that business entity X is more productive than Y, as X brings in $25,000 per labor. On the other hand, entity Y is bringing in $12,500 per labor.

Alternatively, entity X has 20 laborers, and Y has only 10 laborers, but both have the same sales as above, i.e., $100,000. In this case, entity Y is more efficient in running its operations. It is so because Entity Y achieves $10,000 per labor, whereas Entity X achieves $5000 per labor. Additionally, this shows that Entity X is incurring more administrative costs or expenses contrary to Entity Y.

The above measurement units show how accounting measurement provides different insights into the company or a business.

Accounting Measurement Principles

You need to follow up certain principles for doing a proper accounting measurement. The principles of accounting measurement are:-

Matching

The matching principle says that the efforts of a given period should match up with the matching principle's results. When a company sustains a cost to get benefits, it is generally in the form of the revenues that it initiates. And if the revenue is induced immediately, then the company will consider the cost as the expense, and it will appear in its current year income statement.

But if its benefits are to be induced in the future, they will consider it an asset or capital that will occur in the company's balance sheet.

Objectivity

This principle states that a company's accounting information should be reliable and verifiable. It is considered the essential principle of accounting measurement. For this, the value of the assets and liabilities and the value of the transactions must be objectively backed up and determined by the supporting documents.

Consistency

The consistency principle says that the business or company should follow the same principle and method of accounting over the accounting period. It is so because if they follow different methods or principles, financial statement users cannot conclude the data meaningfully.

Revenue Recognition

This principle states that once the company delivers its products and services to the customers, the company determines its revenues. It is the principal feature of the accrual accounting measurement.

FAQs

What are the two bases of measurement in accounting?

The two bases of measurement in accounting is accrual and cash basis. On an accrual basis, the transactions in a company or business are recognized when they happen. And on a cash basis, they are recognized when the cash is received.

What is the importance of measurement in accounting?

Measurement is essential in accounting to prepare a financial statement and determine the current financial position of the company or a business entity.

What are the four basic accounting measurement principles?

The four basic accounting principles are objectivity, consistency, matching, and revenue recognition principle.

Conclusion

So, these were the main things to know about accounting measurement. This article will help you to have a clearer and fairer understanding of what accounting measurement is, its principles, examples, etc. Although accounting measurement is a wider concept, this article will give you all the necessary knowledge regarding accounting measurement.