Periodic Measurement

Periodic measurement

Double-entry book-keeping and periodic measurement

In the previous webpage, we examined the double-entry method as a means of recording financial transactions as flows of money or of money value. We said that firms are continually involved in transactions, and that this activity is mirrored in the double-entry book-keeping process by the constant flow through the accounts system of the money or money values involved in those transactions.

The accounts system is merely a repository of financial data about transactions. To be meaningful, this data must be extracted from the accounts system and organized in such a way that it is useful to those who need information for decision making. The convention of periodicity represents the view that, although the activities of a firm continue through time so that the decisions taken at one point in time cannot be separated from their effects whenever they materialize, those activities should nevertheless be regularly assessed. In other words, the financial health of a business should be tested at periodic intervals The convention of periodicity poses problems in adapting the data recorded in the accounts system so that it will correctly reflect the result of the transactions concluded in the selected period, and the financial health of the firm at the end of that period. The two accounting statements which are employed for this purpose are the income statement for the year, and the balance sheet as at the end of the year.

The purpose of this webpage is to examine the preliminary stages in the preparation of these statements.

Problems in periodic measurement

The reader will recall that when we discussed the convention of periodicity, we noted that not only should the transactions of a period be identified, but also that the expenses attributable to those transactions should be matched with the revenues derived from them in accordance with the matching convention.

The first major problem, therefore, in adapting the information recorded in the accounts system has a two-fold aspect:

(a) to identify the revenues attributable to transactions concluded during the year;

4b) to identify the expenses related to those revenues.

The second major problem concerns other adjustments which must be made in order to arrive at a measure of the surplus or deficit of revenues over expenses. These adjustments involve an element of judgement, for example, how much to write off in respect of depreciation and bad debts, and what adjustments to make in respect of expected losses. We are required to make such adjustments because the end-product is intended to be a statement of the income or loss made in the accounting period.

The idea of periodic measurement which underlies financial reporting presents complex problems, and we have devoted much of Part 3 to the analysis of these problems.

Interested in Normative Theory

Read on: The Generation of Financial Accounting Data Summary

The evolution of double-entry book-keeping has provided accounting with a method of processing data in a systematic manner, and with a means of checking the accuracy of accounting records which was built into its processes by virtue of the interlocking nature of the accounts system. At the end of an accounting period, it is axiomatic that the total debit entries must be equal to the total credit entries.

With the advent of computerized accounting systems, and the widespread use of accounting machines, the usefulness of the double-entry method as a check on the accuracy of record-keeping... see: The Generation of Financial Accounting Data Summary