What is the Money measurement concept

Money measurement concept in Accounting-By this post, we shall study in detail the important Money measurement concept out of 12 various accounting concepts on which accounting is based. If you have a business then you should know about these important Money measurement concepts.

What is the Money measurement concept?

According to the money measurement concept, only those transactions, which can be measured in terms of money are recorded. Since money is the medium of exchange and the standard of economic value, this concept requires that those transactions alone that are capable of being measured in terms of money be only be recorded in the books of accounts.

Can you describe the Money measurement concept with an example?

Yes, As per this concept only those transactions, which can be measured in terms of money are recorded. Since money is the medium of exchange and the standard of economic value, this concept requires that those transactions alone that are capable of being measured in terms of money only be recorded in the books of accounts.

Transactions, even if, they affect the results of the business materially, are not recorded if they are not convertible in monetary terms. Transactions and events that cannot be expressed in terms of money are not recorded in the business books.

For example; employees of the organization are, no doubt, the assets of the organization but their measurement in monetary terms is not possible therefore, not included in the books of account of the organization. Measuring unit for money is taken as the currency of the ruling country i.e., the ruling currency of a country provides a common denomination for the value of material objects.

It may be mentioned that when transactions occur across the boundary of a country, one may see many currencies. Suppose a businessman sells goods worth 50 lakhs at home and he also sells goods worth 2 lakh euros in the United States.

What are his total sales?

50 lakhs plus 2 lakh Euro.

These are not manageable to even arithmetic treatment. So transactions are to be recorded at a uniform monetary unit means in one currency.

Suppose EURO 1 = 73. Total Sales = 50 lakhs plus 146 lakhs = 196 lakhs. Money Measurement Concept imparts the essential flexibility for measurement and interpretation of accounting data.

What are the advantages of money measurement concept?

These are the advantages of the money measurement concept of accounting-

  1. The money measurement concept helps in the preparation of financial statements.
  2. As all the transactions are recorded it becomes easier to compare the results of one period to another.
  3. It helps in maintaining business records. All monetary transactions that take place in an entity are recorded.
  4. It forms a basis of evidence in legal matters.
  5. Business valuation becomes easy as money invested and lost is properly calculated.
  6. The shareholders and investors get enough information about the company’s progress which help them in making out exact inference regarding their investment.
  7. The taxation-related queries and matters get easily comprehended.

What is the limitations of the money measurement concept?

these are the limitations of the money measurement concept of accounting-

  1. There are many factors that contribute to long-term changes in an entity that are not accounted for.
  2. Non-financial transactions that aid in the progress of an entity cannot be recorded in monetary terms which hampers the proper valuation of assets that may be required in the future.
  3. As the value of money is not stable due to inflation and deflation or if the business has international transactions the value of money also fluctuates with exchange rates which may not provide exact information through the book of accounts about the business growth.
  4. Some key underline advantages of business are not accounted for or disclosed in the book of accounts that tends to under-represent the long term ability of a business to generate maximum profits.

What is the importance of the Money measurement concept?

The money measurement concept is very important to make financial statements of a business-

  1. Because money is a common unit to record the transactions related to the assets, liabilities, losses, income and capital. It is helpful in preparing and presenting the statement of Profit and Loss A/c and Balance Sheet.
  2. Business and company valuation calculation becomes easier with money measurement concept as it takes into account only the transactions recorded in monetary terms.
  3. The cost can be attributed to a building, equipment purchased, the hardware used in a company to get a meaningful monetary figure.
  4. Summation of all such items reduced by value of its liabilities will give up the organization’s value.
  5. Many business transactions are recorded on the assumption that money does not change its value too often.

How does the Money measurement concept work?

This concept keeps an important role in making a financial statement in terms of money. how it works, can be known by these examples

First Example

It may be mentioned that when transactions occur across the boundary of a country, one may see many currencies. Suppose a businessman sells goods worth 50 lakhs at home and he also sells goods worth 2 lakh euros in the United States.

What are his total sales?

50 lakhs plus 2 lakh Euro.

These are not manageable to even arithmetic treatment. So transactions are to be recorded at a uniform monetary unit means in one currency.

Suppose EURO 1 = 73. Total Sales = 50 lakhs plus 146 lakhs = 196 lakhs. Money Measurement Concept imparts the essential flexibility for measurement and interpretation of accounting data.

Second Example

The working atmosphere, office culture of the organization, safety measures to prevent hazards in a company, etc all add to the qualitative benefit of the company but cannot be measured in quantity. Hence they have an indirect impact on the financial performance of the entity and can not be recorded.

Third Example

Skills and competence of human personnel employed in a company contribute to the progress and performance of the company although it cannot be attributed as an objective monetary value and therefore is not recognized as assets in the company’s balance sheet. However, transactions related to employees that can be measured in monetary terms such as salary expenses, pension obligations towards the company are to be measured and recognized as a reliable source to be added in financial statements.

Fourth Example

Tata Motors was performing well till March 2020 but one day due to the spread of Covid-19, the government announced a complete lockdown for three months. In these three months, the sale of Tata Motor cars drastically falls down as no cars were sold during these months and the production line halted this caused the company immeasurable loss that cannot be recorded in the book of accounts. But this inevitable event has to be disclosed indirectly in the book of accounts.

Further Faqs related to money measurement concept

  1. What is the definition of the money measurement concept?

    The money measurement concept states that only those events that can be expressed in monetary terms are recorded in the books of accounts of a business. For example, 12 laptops of Rs 30000 each are purchased and this event is recorded in the books of a total amount of Rs 360000.

  2. What is the money unit of measurement?

    The monetary unit principle is the assumption that money itself is treated as a unit of measurement, and that all transactions or economic events recorded in the accounts of a business can be expressed and measured in monetary terms by a currency.

  3. What are the other related concepts of accounting?

    List of other related accounting concepts
    (a) Entity concept
    (b) Money measurement concept
    (c) Periodicity concept
    (d) Accrual concept
    (e) Matching concept
    (f) Going Concern concept
    (g) Cost concept
    (h) Realisation concept
    (i) Dual aspect concept
    (j) Conservatism
    (k) Materiality

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