Reading: Lesson 3 - The measurement process in accounting

Accountants measure a business entity's assets, liabilities, and stockholders' equity and any changes that occur in them. By assigning the effects of these changes to particular time periods (periodicity), they can find the net income or net loss of the accounting entity for those periods. Accountants measure the various assets of a business in different ways. They measure cash at its specified amount. Chapter 9 explains how they measure claims to cash, such as accounts receivable, at their expected cash inflows, taking into consideration possible uncollectibles. They measure inventories, prepaid expenses, plant assets, and intangibles at their historical costs (actual amounts paid). After the acquisition date, they carry some items, such as inventory, at the lower-of-cost-ormarket value. After the acquisition date, they carry plant assets and intangibles at original cost less accumulated depreciation or amortization. They measure liabilities at the amount of cash that will be paid or the value of services that will be performed to satisfy the liabilities.

Accountants can easily measure some changes in assets and liabilities, such as the acquisition of an asset on credit and the payment of a liability. Other changes in assets and liabilities, such as those recorded in adjusting entries, are more difficult to measure because they often involve estimates and/or calculations. The accountant must determine when a change has taken place and the amount of the change. These decisions involve matching revenues and expenses and are guided by the principles discussed next.