Chapter 1 The Role of Accounting in Business 23and other subjective factors may have to be used in preparing financial statements. In
such situations, the most objective evidence available should be used.Unit of Measure Concept
In the United States, the unit of measure conceptrequires that all economic data be
recorded in dollars. Other relevant, nonfinancial information may also be recorded,
such as terms of contracts. However, it is only through using dollar amounts that the
various transactions and activities of a business can be measured, summarized, re-
ported, and compared. Money is common to all business transactions and thus is the
unit of measurement for reporting.Adequate Disclosure Concept
Financial statements, including related footnotes and other disclosures, should contain
all relevant data a reader needs to understand the financial condition and performance
of a business. This is called the adequate disclosure concept. Nonessential data should
be excluded in order to avoid clutter. For example, the balance of each cash account is
usually not reported separately. Instead, the balances are grouped together and re-
ported as one total.Accounting Period Concept
The process in which accounting data are recorded and summarized in financial state-
ments is a period process. Data are recorded, and the income statement, retained earn-
ings statement, and statement of cash flows are prepared for a period of time such as
a month or a year. The balance sheet is then prepared as of the end of the period. After
the accounting process is completed for one period, a new period begins and the
accounting process is repeated for the new period. This process is based on the
accounting period concept.Hershey’s financial statements shown in Exhibits 4–7
illustrate the accounting period concept for the year ending December 31, 2004.
The financial history of a business may be shown by a series of balance sheets and
income statements. If the life of a business is expressed by a line moving from left to
right, this series of financial statements may be graphed as follows:Balance sheet
Dec. 31, 2006DEC.^31
2006FINANCIALHISTORY OF A BUSINESS
Income statement
for the year ended
Dec. 31, 2006
Balance sheet
Dec. 31, 2007DEC.^31
2007Income statement
for the year ended
Dec. 31, 2007Balance sheet
Dec. 31, 2008DEC.^31
2008Income statement
for the year ended
Dec. 31, 2008Responsible Reporting
The reliability of the financial reporting system is important to the economy and for the
ability of businesses to raise money from investors. That is, stockholders and creditors
require accurate financial reporting before they will invest their money. Scandals and
financial reporting frauds in the early 2000s threatened the confidence of U.S. investors.
Exhibit 9 is a partial list of some of the financial reporting frauds and abuses.