An Induced Theory of Accounting Measurement

This paper addresses a wide gap in the literature of accounting: the absence of a descriptive theory of accounting measurement. It begins with a review of accounting practices aimed at finding what accounting attempts to measure. It goes on to examine specific measurement practices to ascertain what measurement methods are used and the qualities characterizing those methods. Finally, the paper seeks a central idea that explains the bulk of accounting measurement practices. The method employed is empirical and inductive. The results range from the obvious to the surprising. Accounting measurements focus on aspects of wealth. Eight general measurement methods are used to varying extents. The qualities most frequently associated with those methods and the resulting measurements are stability of the income statement line item involved, conservatism, and flexibility and control of income measurement by management. The common thread that holds GAAP measurement practices together is the notion of market simulation; in the absence of observable current market prices for setting-specific assets and liabilities, accounting simulates such prices by selecting and blending pertinent observed market prices and other evidence in accordance with accepted principles of market economics.