What Is Accounting Measurement?
Accounting is often measured in terms of money. For example, when a company records weekly sales at $10,000, the same company could record those transactions in terms of units sold; for instance, 5,000 units (of $2.00 products). Accounting measurement is the computation of economic or financial data in terms of money, hours, or other units.
The method used in accounting measurement helps compare and evaluate accounting data. When a company uses standard accounting measurements, it becomes easier to compare certain variables over specific time frames and therefore allows a company to better understand how it operates. This could include units sold, unit revenues, hours worked, cost per hour, etc. It also helps investors and analysts compare one company to another by digging into exactly how certain accounting information is represented.
- Accounting measurement is the representation of data in terms of a specific method, such as currency, hours, or units.
- The same data can be measured in a variety of ways. Maintaining a consistent accounting measurement allows firms and analysts to compare certain variables over a period of time.
- The unit of measure concept states that all reported currency must be reported in the same currency, regardless if certain transactions were done in a foreign currency.
Understanding Accounting Measurement
Accounting is often quantified in terms of money but can also be recorded in terms of alternative units, number of labor hours, number of jobs created, etc. Different accounting measurements provide different views on the overall state of a corporation. By using a variety of different accounting measurements, a person can gain a more comprehensive perspective of a company's operations and more easily compare them with those of other companies.
Generally accepted accounting principles (GAAP) does not specifically state accounting measurement standards, but it does specify the types of accounting methods that need to be used.
A close concept to accounting measurement is that of the unit of measure concept. This states that all reported data presented in a currency must be consistently reported in that same currency, regardless of the currency the business has been transacted in. For example, if some business is transacted in Euros, but the company reports in dollars, then it must convert the Euros into dollars when reporting.
Example of Accounting Measurement
Two companies have weekly sales of $20,000, but Company ABC achieves this with four salespeople and Company XYZ achieves it with eight. In this case, Company ABC's sales team is much more productive, bringing in $5,000 per salesperson per week versus only $2,500 per salesperson per week for Company XYZ.
On the other hand, if Company ABC has a total of 100 employees and Company XYZ has a total of 50, then Company A is achieving only $200 per employee ($20,000/100) and Company XYZ is achieving $400 per employee ($20,000/50). This can suggest that Company ABC has high administrative costs or that Company XYZ is a more efficient business.
The use of these different units of measure are examples of how accounting measurements provide further insight into a company. It allows investors and analysts to understand what the surface information really depicts.