ICAI Notes- Unit 6: Accounting as a Measurement Discipline – Valuation Principles, Acc. Estimates | Principles and Practice of Accounting - CA Foundation PDF Download

 Page 1


 
 
    
 1.87
THEORETICAL FRAMEWORK 
 
LEARNING OUTCOMES 
UNIT – 6 ACCOUNTING AS A MEASUREMENT 
DISCIPLINE – VALUATION PRINCIPLES, 
ACCOUNTING ESTIMATES 
 
 
 
After studying this Unit, you will be able to: 
? Understand the meaning of measurement and its basic elements. 
? Know how far accounting is a measurement discipline if considered 
from the standpoint of the basic elements of measurement. 
? Distinguish measurement from valuation. 
? Learn the different measurement bases namely historical cost, 
realizable value and present value. 
? Understand the measurement bases which can give objective and 
valuation to transactions and events. 
? Understand that the traditional accounting system mostly uses 
historical cost as measurement base, although in some cases other 
measurement bases are also used. 
 
 
 
 
 
 
 
 
© The Institute of Chartered Accountants of India
Page 2


 
 
    
 1.87
THEORETICAL FRAMEWORK 
 
LEARNING OUTCOMES 
UNIT – 6 ACCOUNTING AS A MEASUREMENT 
DISCIPLINE – VALUATION PRINCIPLES, 
ACCOUNTING ESTIMATES 
 
 
 
After studying this Unit, you will be able to: 
? Understand the meaning of measurement and its basic elements. 
? Know how far accounting is a measurement discipline if considered 
from the standpoint of the basic elements of measurement. 
? Distinguish measurement from valuation. 
? Learn the different measurement bases namely historical cost, 
realizable value and present value. 
? Understand the measurement bases which can give objective and 
valuation to transactions and events. 
? Understand that the traditional accounting system mostly uses 
historical cost as measurement base, although in some cases other 
measurement bases are also used. 
 
 
 
 
 
 
 
 
© The Institute of Chartered Accountants of India
  
 
ACCOUNTING 
  
1.88 
 
 
 
 
 
 6.1  MEANING OF MEASUREMENT 
Measurement is vital aspect of accounting. Primarily transactions and events are measured in 
terms of money. Any measurement discipline deals with three basic elements of measurement 
viz., identification of objects and events to be measured, selection of standard or scale to be 
used, and evaluation of dimension of measurement standards or scale. 
Prof.  R. J. Chambers 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”. (R.J. Chambers, Accounting Evaluation and Economic Behaviour, 
Prentice Hall, Englewood Cliffs, N.J. 1966, P.10). 
 
Valuation Principles
Historical Cost Current Cost Relizable Value
Present 
Value
Elements of Measurement
Identification of Objects 
and Events
Selection of Standards 
or Scale
Evaluation of Dimension 
of Measurement 
Standards or Scale
UNIT OVERVIEW
© The Institute of Chartered Accountants of India
Page 3


 
 
    
 1.87
THEORETICAL FRAMEWORK 
 
LEARNING OUTCOMES 
UNIT – 6 ACCOUNTING AS A MEASUREMENT 
DISCIPLINE – VALUATION PRINCIPLES, 
ACCOUNTING ESTIMATES 
 
 
 
After studying this Unit, you will be able to: 
? Understand the meaning of measurement and its basic elements. 
? Know how far accounting is a measurement discipline if considered 
from the standpoint of the basic elements of measurement. 
? Distinguish measurement from valuation. 
? Learn the different measurement bases namely historical cost, 
realizable value and present value. 
? Understand the measurement bases which can give objective and 
valuation to transactions and events. 
? Understand that the traditional accounting system mostly uses 
historical cost as measurement base, although in some cases other 
measurement bases are also used. 
 
 
 
 
 
 
 
 
© The Institute of Chartered Accountants of India
  
 
ACCOUNTING 
  
1.88 
 
 
 
 
 
 6.1  MEANING OF MEASUREMENT 
Measurement is vital aspect of accounting. Primarily transactions and events are measured in 
terms of money. Any measurement discipline deals with three basic elements of measurement 
viz., identification of objects and events to be measured, selection of standard or scale to be 
used, and evaluation of dimension of measurement standards or scale. 
Prof.  R. J. Chambers 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”. (R.J. Chambers, Accounting Evaluation and Economic Behaviour, 
Prentice Hall, Englewood Cliffs, N.J. 1966, P.10). 
 
Valuation Principles
Historical Cost Current Cost Relizable Value
Present 
Value
Elements of Measurement
Identification of Objects 
and Events
Selection of Standards 
or Scale
Evaluation of Dimension 
of Measurement 
Standards or Scale
UNIT OVERVIEW
© The Institute of Chartered Accountants of India
 
 
    
 1.89 
THEORETICAL FRAMEWORK 
 
Kohler defined measurement as the assignment of a system of ordinal or cardinal numbers to 
the results of a scheme of inquiry or apparatus of observations in accordance with logical or 
mathematical rules – [A Dictionary of Accountant]. 
Ordinal numbers, or ordinals, are numbers used to denote the position in an ordered 
sequence: first, second, third, fourth, etc., whereas a cardinal number says ‘how many there 
are’: one, two, three, four, etc. 
Chambers’ definition has been widely used to judge how far accounting can be treated as a 
measurement discipline. 
According to this definition, the three elements of measurement are: 
(1) Identification of objects and events to be measured; 
(2) Selection of standard or scale to be used; 
(3) Evaluation of dimension of measurement standard or scale. 
 6.2  OBJECTS OR EVENTS TO BE MEASURED 
We have earlier defined Accounting as the process of identifying, measuring and 
communicating economic information to permit informed judgements and decisions by the 
users of the information. So accounting essentially includes measurement of ‘information’. 
Decision makers need past, present and future information. For external users, generally the past 
information is communicated. 
There is no uniform set of events and transactions in accounting which are required for 
decision making. For example, in cash management, various cash receipts and expenses are 
the necessary objects and events. Obviously, the decision makers need past cash receipts and 
expenses data along with projected receipts and expenses. For giving loan to a business one 
needs information regarding the repayment ability (popularly called debt servicing) of 
principal and interest. This also includes past information, current state of affairs as well as 
future projections. It may be mentioned that past and present objects and events can be 
measured with some degree of accuracy but future events and objects are only predicted, not 
measured. Prediction is an essential part of accounting information. Decision makers have to 
take decisions about the unseen future for which they need suitable information. 
 6.3  STANDARD OR SCALE OF MEASUREMENT 
In accounting, money is the scale of measurement (see money measurement concept), 
although now-a- days quantitative information is also communicated along with monetary 
information. 
© The Institute of Chartered Accountants of India
Page 4


 
 
    
 1.87
THEORETICAL FRAMEWORK 
 
LEARNING OUTCOMES 
UNIT – 6 ACCOUNTING AS A MEASUREMENT 
DISCIPLINE – VALUATION PRINCIPLES, 
ACCOUNTING ESTIMATES 
 
 
 
After studying this Unit, you will be able to: 
? Understand the meaning of measurement and its basic elements. 
? Know how far accounting is a measurement discipline if considered 
from the standpoint of the basic elements of measurement. 
? Distinguish measurement from valuation. 
? Learn the different measurement bases namely historical cost, 
realizable value and present value. 
? Understand the measurement bases which can give objective and 
valuation to transactions and events. 
? Understand that the traditional accounting system mostly uses 
historical cost as measurement base, although in some cases other 
measurement bases are also used. 
 
 
 
 
 
 
 
 
© The Institute of Chartered Accountants of India
  
 
ACCOUNTING 
  
1.88 
 
 
 
 
 
 6.1  MEANING OF MEASUREMENT 
Measurement is vital aspect of accounting. Primarily transactions and events are measured in 
terms of money. Any measurement discipline deals with three basic elements of measurement 
viz., identification of objects and events to be measured, selection of standard or scale to be 
used, and evaluation of dimension of measurement standards or scale. 
Prof.  R. J. Chambers 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”. (R.J. Chambers, Accounting Evaluation and Economic Behaviour, 
Prentice Hall, Englewood Cliffs, N.J. 1966, P.10). 
 
Valuation Principles
Historical Cost Current Cost Relizable Value
Present 
Value
Elements of Measurement
Identification of Objects 
and Events
Selection of Standards 
or Scale
Evaluation of Dimension 
of Measurement 
Standards or Scale
UNIT OVERVIEW
© The Institute of Chartered Accountants of India
 
 
    
 1.89 
THEORETICAL FRAMEWORK 
 
Kohler defined measurement as the assignment of a system of ordinal or cardinal numbers to 
the results of a scheme of inquiry or apparatus of observations in accordance with logical or 
mathematical rules – [A Dictionary of Accountant]. 
Ordinal numbers, or ordinals, are numbers used to denote the position in an ordered 
sequence: first, second, third, fourth, etc., whereas a cardinal number says ‘how many there 
are’: one, two, three, four, etc. 
Chambers’ definition has been widely used to judge how far accounting can be treated as a 
measurement discipline. 
According to this definition, the three elements of measurement are: 
(1) Identification of objects and events to be measured; 
(2) Selection of standard or scale to be used; 
(3) Evaluation of dimension of measurement standard or scale. 
 6.2  OBJECTS OR EVENTS TO BE MEASURED 
We have earlier defined Accounting as the process of identifying, measuring and 
communicating economic information to permit informed judgements and decisions by the 
users of the information. So accounting essentially includes measurement of ‘information’. 
Decision makers need past, present and future information. For external users, generally the past 
information is communicated. 
There is no uniform set of events and transactions in accounting which are required for 
decision making. For example, in cash management, various cash receipts and expenses are 
the necessary objects and events. Obviously, the decision makers need past cash receipts and 
expenses data along with projected receipts and expenses. For giving loan to a business one 
needs information regarding the repayment ability (popularly called debt servicing) of 
principal and interest. This also includes past information, current state of affairs as well as 
future projections. It may be mentioned that past and present objects and events can be 
measured with some degree of accuracy but future events and objects are only predicted, not 
measured. Prediction is an essential part of accounting information. Decision makers have to 
take decisions about the unseen future for which they need suitable information. 
 6.3  STANDARD OR SCALE OF MEASUREMENT 
In accounting, money is the scale of measurement (see money measurement concept), 
although now-a- days quantitative information is also communicated along with monetary 
information. 
© The Institute of Chartered Accountants of India
  
 
ACCOUNTING 
  
1.90 
Money as a measurement scale has no universal denomination. It takes the shape of currency 
ruling in a country. For example, in India the scale of measurement is Rupee, in the U.K. Pound-
Sterling (£), in Germany Deutschmark (DM), in the United States Dollar ($) and so on. Also there 
is no constant exchange relationship among the currencies. 
If one businessman in India took loan $5,000 from a businessman of the U.S.A., he would enter 
the transaction in his books in terms of ` Suppose at the time of loan agreement exchange 
rate was US $ = ` 50. Then loan amounted to ` 2,50,000. Afterwards the exchange rate has 
been changed to $ 1 = ` 55. At the changed exchange rate the loan amount becomes` 
2,75,000. So money as a unit of measurement lacks universal applicability across the boundary 
of a country unless a common currency is in vogue. Since the rate of exchange fluctuates 
between two currencies over the time, money as a measurement scale also becomes volatile. 
 6.4  DIMENSION OF MEASUREMENT SCALE 
An ideal measurement scale should be stable over time. For example, if one buys 1 kg. cabbage 
today, the quantity he receives will be the same if he will buy 1 kg. cabbage one year later. 
Similarly, length of 1 metre cloth will not change if it is bought a few days later. That is to say 
a measurement scale should be stable in dimension. Money as a scale of measurement is not 
stable. There occurs continuous change   in the input output prices. The same quantity of 
money may not have the ability to buy same quantity of identical goods at different dates. 
Thus information of one year measured in money terms may not be comparable with that of 
another year. Suppose production and sales of a company in two different years are as follows: 
Year 1 Year 2
Qty. 
` 
Qty.
` 
5,000 pcs 5,00,000 4,500 pcs 5,40,000 
Looking at the monetary figures one may be glad for 8% sales growth. In fact there was 10% 
production and sales decline. The growth envisaged through monetary figures is only due to 
price change. Let us suppose further that the cost of production for the above mentioned two 
years is as follows: 
Year 1 Year 2 
Qty. 
` Qty. ` 
5,000 pcs 4,00,000 4,500 pcs 4,50,000 
Take Gross profit = Sales – Cost of Production. Then in the first year profit was ` 1,00,000 while 
in the second year the profit was ` 90,000. There was 10% decline in gross profit. 
So, money as a unit of measurement is not stable in the dimension. 
© The Institute of Chartered Accountants of India
Page 5


 
 
    
 1.87
THEORETICAL FRAMEWORK 
 
LEARNING OUTCOMES 
UNIT – 6 ACCOUNTING AS A MEASUREMENT 
DISCIPLINE – VALUATION PRINCIPLES, 
ACCOUNTING ESTIMATES 
 
 
 
After studying this Unit, you will be able to: 
? Understand the meaning of measurement and its basic elements. 
? Know how far accounting is a measurement discipline if considered 
from the standpoint of the basic elements of measurement. 
? Distinguish measurement from valuation. 
? Learn the different measurement bases namely historical cost, 
realizable value and present value. 
? Understand the measurement bases which can give objective and 
valuation to transactions and events. 
? Understand that the traditional accounting system mostly uses 
historical cost as measurement base, although in some cases other 
measurement bases are also used. 
 
 
 
 
 
 
 
 
© The Institute of Chartered Accountants of India
  
 
ACCOUNTING 
  
1.88 
 
 
 
 
 
 6.1  MEANING OF MEASUREMENT 
Measurement is vital aspect of accounting. Primarily transactions and events are measured in 
terms of money. Any measurement discipline deals with three basic elements of measurement 
viz., identification of objects and events to be measured, selection of standard or scale to be 
used, and evaluation of dimension of measurement standards or scale. 
Prof.  R. J. Chambers 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”. (R.J. Chambers, Accounting Evaluation and Economic Behaviour, 
Prentice Hall, Englewood Cliffs, N.J. 1966, P.10). 
 
Valuation Principles
Historical Cost Current Cost Relizable Value
Present 
Value
Elements of Measurement
Identification of Objects 
and Events
Selection of Standards 
or Scale
Evaluation of Dimension 
of Measurement 
Standards or Scale
UNIT OVERVIEW
© The Institute of Chartered Accountants of India
 
 
    
 1.89 
THEORETICAL FRAMEWORK 
 
Kohler defined measurement as the assignment of a system of ordinal or cardinal numbers to 
the results of a scheme of inquiry or apparatus of observations in accordance with logical or 
mathematical rules – [A Dictionary of Accountant]. 
Ordinal numbers, or ordinals, are numbers used to denote the position in an ordered 
sequence: first, second, third, fourth, etc., whereas a cardinal number says ‘how many there 
are’: one, two, three, four, etc. 
Chambers’ definition has been widely used to judge how far accounting can be treated as a 
measurement discipline. 
According to this definition, the three elements of measurement are: 
(1) Identification of objects and events to be measured; 
(2) Selection of standard or scale to be used; 
(3) Evaluation of dimension of measurement standard or scale. 
 6.2  OBJECTS OR EVENTS TO BE MEASURED 
We have earlier defined Accounting as the process of identifying, measuring and 
communicating economic information to permit informed judgements and decisions by the 
users of the information. So accounting essentially includes measurement of ‘information’. 
Decision makers need past, present and future information. For external users, generally the past 
information is communicated. 
There is no uniform set of events and transactions in accounting which are required for 
decision making. For example, in cash management, various cash receipts and expenses are 
the necessary objects and events. Obviously, the decision makers need past cash receipts and 
expenses data along with projected receipts and expenses. For giving loan to a business one 
needs information regarding the repayment ability (popularly called debt servicing) of 
principal and interest. This also includes past information, current state of affairs as well as 
future projections. It may be mentioned that past and present objects and events can be 
measured with some degree of accuracy but future events and objects are only predicted, not 
measured. Prediction is an essential part of accounting information. Decision makers have to 
take decisions about the unseen future for which they need suitable information. 
 6.3  STANDARD OR SCALE OF MEASUREMENT 
In accounting, money is the scale of measurement (see money measurement concept), 
although now-a- days quantitative information is also communicated along with monetary 
information. 
© The Institute of Chartered Accountants of India
  
 
ACCOUNTING 
  
1.90 
Money as a measurement scale has no universal denomination. It takes the shape of currency 
ruling in a country. For example, in India the scale of measurement is Rupee, in the U.K. Pound-
Sterling (£), in Germany Deutschmark (DM), in the United States Dollar ($) and so on. Also there 
is no constant exchange relationship among the currencies. 
If one businessman in India took loan $5,000 from a businessman of the U.S.A., he would enter 
the transaction in his books in terms of ` Suppose at the time of loan agreement exchange 
rate was US $ = ` 50. Then loan amounted to ` 2,50,000. Afterwards the exchange rate has 
been changed to $ 1 = ` 55. At the changed exchange rate the loan amount becomes` 
2,75,000. So money as a unit of measurement lacks universal applicability across the boundary 
of a country unless a common currency is in vogue. Since the rate of exchange fluctuates 
between two currencies over the time, money as a measurement scale also becomes volatile. 
 6.4  DIMENSION OF MEASUREMENT SCALE 
An ideal measurement scale should be stable over time. For example, if one buys 1 kg. cabbage 
today, the quantity he receives will be the same if he will buy 1 kg. cabbage one year later. 
Similarly, length of 1 metre cloth will not change if it is bought a few days later. That is to say 
a measurement scale should be stable in dimension. Money as a scale of measurement is not 
stable. There occurs continuous change   in the input output prices. The same quantity of 
money may not have the ability to buy same quantity of identical goods at different dates. 
Thus information of one year measured in money terms may not be comparable with that of 
another year. Suppose production and sales of a company in two different years are as follows: 
Year 1 Year 2
Qty. 
` 
Qty.
` 
5,000 pcs 5,00,000 4,500 pcs 5,40,000 
Looking at the monetary figures one may be glad for 8% sales growth. In fact there was 10% 
production and sales decline. The growth envisaged through monetary figures is only due to 
price change. Let us suppose further that the cost of production for the above mentioned two 
years is as follows: 
Year 1 Year 2 
Qty. 
` Qty. ` 
5,000 pcs 4,00,000 4,500 pcs 4,50,000 
Take Gross profit = Sales – Cost of Production. Then in the first year profit was ` 1,00,000 while 
in the second year the profit was ` 90,000. There was 10% decline in gross profit. 
So, money as a unit of measurement is not stable in the dimension. 
© The Institute of Chartered Accountants of India
 
 
    
 1.91 
THEORETICAL FRAMEWORK 
 
Thus, Accounting measures information mostly in money terms which is not a stable scale 
having universal applicability and also not stable in dimension for comparison over the time. So 
it is not an exact measurement discipline. 
 6.5  ACCOUNTING AS A MEASUREMENT DISCIPLINE 
How do you measure a transaction or an event? Unless the measurement base is settled we 
cannot progress to the record keeping function of book-keeping. It has been explained that 
accounting is meant for generating information suitable for users’ judgments and decisions. 
But generation of such information is preceded by recording, classifying and summarising 
data. By that process it measures performance of the business entity by way of profit or loss 
and shows its financial position. Thus, measurement is an important part of accounting 
discipline. But a set of theorems governs the whole measurement sub- system. These 
theorems should be carefully understood to know how the cogs of the ‘accounting-wheel’ 
work. Now-a-days accounting profession earmarked three theorems namely going concern, 
consistency and accrual as fundamental accounting assumptions, i.e., these assumptions are 
taken for granted. Also while measuring, classifying, summarising and also presenting, various 
policies are adopted. Recording, classifying summarising and communication of information 
are also important part of accounting, which do not fall within the purview of measurement 
discipline. Therefore, we cannot simply say that accounting is a measurement discipline. 
But in accounting money is the unit of measurement. So, let us take one thing for granted that all 
transactions and events are to be recorded in terms of money only. Quantitative information 
is also required in many cases but such information is only supplementary to monetary 
information. 
 6.6  VALUATION PRINCIPLES 
There are four generally accepted measurement bases or valuation principles. These are: 
(i) Historical Cost; 
(ii) Current Cost; 
(iii) Realizable Value; 
(iv) Present Value. 
  
© The Institute of Chartered Accountants of India