The basic postulate of valuation, included in NIF A-2, establishes that all transactions and economic events that affect an entity must be quantified and expressed in monetary terms.
This postulate ensures that the resources, obligations and results of an entity are presented in the financial statements with a reliable and verifiable economic value.
Key Points of the Valuation Postulate:
- Monetary Quantification:
- All transactions and events must be measured in terms of money. This allows the different elements in the financial statements to be comparable and understandable to users.
- Economic Value:
- Items should be recognized in the financial statements at fair value, historical cost, or some other appropriate valuation criterion based on the nature of the transaction and applicable regulations.
- Reliability:
- Valuation should be based on data and figures that can be verified. This reinforces the credibility of the information presented in the financial statements.
Simple Example:
Suppose a company purchases a vehicle for its operation for $300,000.
- Accounting Record:
- Post: Asset (Vehicle) $300,000
- Pass: Banks or Suppliers $300,000
This record reflects the valuation of the vehicle at its acquisition cost, which is a reliable and verifiable basis. This asset can subsequently be depreciated according to its useful life, which follows the valuation rules.
Conclusion:
The basic valuation postulate is crucial to consistency and accuracy in the presentation of financial information. By ensuring that all items in the financial statements are measured in monetary terms and valued reliably, this postulate ensures that users of financial statements have a sound basis for evaluating the entity's financial condition and making informed decisions.
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