Measurement Bases

Measurement Bases

A financial item is first measured and then recognized in the financial statement. Measurement primarily is value determination of financial item for recognition in the financial statements. There are following important measurement bases

1.    Historical Cost

2.    Market Value

3.    Present Value

4.    Current Cost

1.    Historical Cost Measurement Bases

Historical cost is an important measurement bases and widely used for recognition of financial item. It is to be noted that historical bases is widely used for initial recognition of financial items. Plant & machinery, inventory, investment all are initially recognized at historical cost bases.

2.    Fair Value Measurement Bases

Fair value is another important measurement bases used by the accountants. Other name of Fair value measurement is Market value measurement. Fair value measurement concept is used both in financial accounting and management accounting. It is to be noted that historical cost and fair value measurement bases are the most common measurement bases in the business world.

3.    Current or Replacement Cost Measurement Bases

Current cost measurement is also used by the accountants for valuing the asset. The replacing cost of an asset is used to value the asset. Therefore this measurement bases is also known replacing cost measurement. In financial accounting, current cost valuation method has little use; however this measurement method is extensively used by the management accountant in decision making.

4.    Present Value Measurement Bases

Present values are discounted value of future cash flow. There are two types of discounted cash flows used as measurement bases i.e. discounting the cash inflow and discounting the cash outflows. Cash inflows from asset are discounted to value the asset, while cash outflow are discounted to value the liability.