Duality and Measurement in Accounting

Duality

• Definition: Represents double entry bookkeeping where every transaction has two sides.

• Example: Buying a bar of chocolate involves two elements:

  • Cash (money given)

  • Chocolate (item received)

• Business Application: When a business makes a sale on credit:

  • Trade Receivables (Assets): Increase, representing money owed by customers.

  • Sales (Income): Also increase.

• Every transaction affects two general ledger accounts; a transaction without both is incorrect.

• In computerized systems, only one side may need input, but understanding both sides is crucial.

Measurement Bases

• Conceptual Framework: Two measurement bases for financial statements are:

  • Historic Cost

  • Current Value

• These measurement rules ensure numbers in financial statements are accurate and not arbitrary.

Historic Cost

• Definition: The amount paid for an asset at the time of purchase.

  • Example: If a building was purchased for $1,000, its historic cost is $1,000.

• Advantages:

  • Reliable and verifiable, as it is based on actual transactions (invoice matched).

  • Consistent financial position and cash flow since both use the same basis.

  • Limits the potential for manipulation (e.g., avoiding overvaluation).

  • Easily understood by most users.

Current Value

• Definition: The value at today’s date or the balance sheet date.

• Can be derived through:

  • Fair Value: Price obtainable in an orderly market transaction.

  • Value in Use: Specific to the entity; based on present value of expected cash flows from the asset.

  • Current Cost: The cost of acquiring an equivalent asset at the measurement date.

Fair Value

• Definition: Price for selling an asset in a genuine market transaction.

• Determination:

  • Market participants' price for asset transfer in an orderly transaction.

  • Estimations may involve future cash flows or time value of money.

Value in Use

• Definition: Specific value for an entity based on expected income from using the asset.

  • Involves present value of expected cash flows from the asset.

Current Cost

• Definition: The cost to acquire an equivalent asset at present, minus depreciation for age.

• Liabilities: Current cost also reflects the value someone would pay to assume a debt.

Advantages of Current Value

• More relevant for decision-making since it reflects today’s values.

• Helps assess business stability and vulnerability, influencing management's decisions.

• Useful in predicting future performance and ensuring accountability from management.