Measurement rules

Measurement rules decide how data ought to be recorded.

There are six vital rules to consider.

Money measurement

Money measurement requests that accounting transactions should only be recorded if they are expressed in money terms, ie the accounting transactions to be recorded should be quantifiable information, rather than qualitative information.

As a result, a huge number of items are not reflected in the company’s accounting records and for this reason, they do not appear on the financial statements.

Examples in a construction firm of items that cannot be recorded as accounting transactions (because they cannot be expressed in terms of money) include the skills of the construction professionals within the firm or the working conditions of the employees.

The aforementioned examples are indirectly reflected in the financial results of the construction business because they have an impact on either revenues, expenses, assets or liabilities. For example, if the site working conditions are poor for construction professionals, this leads to greater employee turnover, which increases labour-related expenses.

Historic cost

Historic cost is considered as the original cost of an asset as recorded in an entity’s accounting records.

A lot of recorded transactions in a firm’s accounting records are stated at their historical cost and they can be easily proven by accessing the source purchase or trade documents.

However, historic cost has the disadvantage of not necessarily representing the actual price value of an asset, which is likely to differ from its purchase cost over time.

Realisation

Realisation is seen as the point in time when a firm generates revenue. This occurs when the customer gains control over the good or service transferred from a seller.

Indicators of this date could be when the seller (business organisation) has the right to receive payment from the buyer (customer), when the buyer (customer) has legal title to the transferred asset, or when the buyer (customer) accepts the asset.

Matching

Matching requires that revenues and any related expenses generated by a business be recognised together in the same period.

Thus, if there is a cause-and-effect relationship between revenue and the expenses, they should be recorded at the same time. If there is no such relationship, then the cost of the expense should be charged at once.

This is one of the most essential concepts in accrual basis accounting as it mandates that the entire effect of a transaction be recorded within the same period.

For example, when a construction organisation orders a concrete mixer for £50,000 that has a projected useful lifespan 10 years, it should charge the cost of the equipment to depreciation expense at the rate of £5,000 annually for 10 years.

Dual aspect

Dual aspect requires that every business transaction should be recorded in two separate accounts. This is based on the double-entry accounting system, which is required by all accounting frameworks so as to produce a reliable financial statement.

Materiality

Materiality is known as the threshold above which missing or incorrect information in financial statements is considered to have an impact on the decision of the users.

Materiality is occasionally formulated in terms of net impact on profit reported, or the percentage of trading currency change in a specific line item in the financial statements.

For example, a business reports a profit of £20,000, which is the point at which earnings per share exactly meets analyst expectations. Any decrease in profit lower than this point would have triggered a sell-off of the shares of the business, and so would be considered material.

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This article is from the free online course:

An Introduction to Financial Management in Construction

Coventry University