Recognition and Measurement in Financial Statements

Executive Summary

Recognition in financial statements is the process of recording the effects of any economic event pertaining to various accounts of an entity. The item is recorded after being identified as an asset, liability, revenue, expense or others similar to it. The decision that should be taken on what characteristic of an item should be measured and its unit of measure falls under the measurement of items in the financial statements. While recognizing items in the financial statements, accountants and managers should make decisions on what events should be communicated in the financial statements and how the effects of the events should be measured in the financial statements.

Recognition describes items in both words and numbers. Financial statements are considered as a channel of communication between the entity and its external users. The external users depend on the financial statements to make relevant economic decisions.

It is the responsibility of the accountants to provide financial statements that will be useful for these users for making their decisions and the process through which an accountant describes economic events in the financial statements is by recognition. Terms like assets, revenues, liabilities and expenses are representations of the actual and detailed content of what lies within them. These terms are used in the financial statements as accountants cannot disclose every detail about their entity to the external users.

While recognizing items in the financial statements, it is necessary to quantify the effect of the economic events. Before quantifying the items, it is necessary to decide on the attribute to be measured and the unit of measure.

When putting a value on assets, an accountant can either use the historical cost or the current value. These are the characteristic or attribute of an item according to...