Fixed Asset Measurement (I)

Abstract

The measurement of asset values for accounting purposes is inseparable from the determination of business income. Business income has been described earlier as the increase in owner’s wealth or owner’s interest over a period of time. Owner’s interest itself represents residual claims on the net assets of an organisation, i.e.

$${\text{Business income = Owner's }}\operatorname{int} {\text{eres}}{{\text{t}}_{t2}} - {\text{Owner's }}\operatorname{int} {\text{eres}}{{\text{t}}_{tl}}$$

where

$${\text{Owner's }}\operatorname{int} {\text{eres}}{{\text{t}}_t} = {\text{Asset}}{{\text{s}}_t} - {\text{Liabilitie}}{{\text{s}}_t}$$

Hence the determination of periodic business income is based on the values assigned to the assets and liabilities of the business. The accounting determination of income is not, however, normally undertaken through a process of valuation but through the allocation of the revenues earned and expenses incurred to each accounting period. Asset values are only indirectly included in an historic cost system of accounting. For example, the change in value of goods sold during an accounting period is recognised by crediting the Profit and Loss Account with the revenues received on sale of goods and debiting with the cost of acquiring, or manufacturing, those goods. The valuation or measurement of other assets (and liabilities) remaining in the business at the end of an accounting period has not yet been considered explicitly.