Page 199 - Accounting Principles (A Business Perspective)

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Accountants often cite the going-concern assumption to justify using historical costs rather than market values
in measuring assets. Market values are of less significance to an entity using its assets rather than selling them. On
the other hand, if an entity is liquidating, it should use liquidation values to report assets.

The economic activity of a business is normally recorded and reported in money terms. Money measurement
is the use of a monetary unit such as the dollar instead of physical or other units of measurement. Using a particular
monetary unit provides accountants with a common unit of measurement to report economic activity. Without a
monetary unit, it would be impossible to add such items as buildings, equipment, and inventory on a balance sheet.
Financial statements identify their unit of measure (such as the dollar in the United States) so the statement
user can make valid comparisons of amounts. For example, it would be difficult to compare relative asset amounts
or profitability of a company reporting in US dollars with a company reporting in Japanese yen.

In the United States, accountants make another assumption regarding money measurement—the stable dollar
assumption. Under the stable dollar assumption, the dollar is accepted as a reasonably stable unit of
measurement. Thus, accountants make no adjustments for the changing value of the dollar in the primary financial
statements.
Using the stable dollar assumption creates a difficulty in depreciation accounting. Assume, for example, that a
company acquired a building in 1975 and computed the 30-year straight-line depreciation on the building without
adjusting for any changes in the value of the dollar. Thus, the depreciation deducted in 2008 is the same as the
depreciation deducted in 1975. The company makes no adjustments for the difference between the values of the
1975 dollar and the 2008 dollar. Both dollars are treated as equal monetary units of measurement despite

substantial price inflation over the 30-year period. Accountants and business executives have expressed concern
over this inflation problem, especially during periods of high inflation.
According to the periodicity (time periods) assumption, accountants divide an entity's life into months or
years to report its economic activities. Then, accountants attempt to prepare accurate reports on the entity's
activities for these periods. Although these time-period reports provide useful and timely financial information for
investors and creditors, they may be inaccurate for some of these time periods because accountants must estimate
depreciation expense and certain other adjusting entries.

Accounting reports cover relatively short periods. These time periods are usually of equal length so that
statement users can make valid comparisons of a company's performance from period to period. The length of the
accounting period must be stated in the financial statements. For instance, so far, the income statements in this text
were for either one month or one year. Companies that publish their financial statements, such as publicly held
corporations, generally prepare monthly statements for internal management and publish financial statements
quarterly and annually for external statement users.
Accrual basis and periodicity Chapter 3 demonstrated that financial statements more accurately reflect the
financial status and operations of a company when prepared under the accrual basis rather than the cash basis of
accounting. Under the cash basis, we record revenues when cash is received and expenses when cash is paid. Under

the accrual basis, however, we record revenues when services are rendered or products are sold and expenses when
incurred.
The periodicity assumption requires preparing adjusting entries under the accrual basis. Without the periodicity
assumption, a business would have only one time period running from its inception to its termination. Then, the
concepts of cash basis and accrual basis accounting would be irrelevant because all revenues and all expenses would

Accounting Principles: A Business Perspective 200 A Global Text