In this article, you will be learning about Money Measurement Concept in Accounting states that a company should only record those events or transactions in its financial statement that can be measured in terms of money, and that transactions that cannot be assigned a monetary value should not be recorded in the financial statement.
Money Measurement Concept in Accounting
- Only those transactions and events that can be measured in monetary terms are recorded in the books. In other words, all events and transactions that cannot be quantified in monetary terms are excluded from the company’s financial statements.
- Only transactions and events that can be measured in monetary terms are recognized in financial statements, according to the Money Measurement Concept, also known as Measurability Concept.
- All transactions and events in financial statements must be reduced to a monetary currency unit. A transaction or event shall not be recorded in the financial statements if a reliable monetary value cannot be assigned to it.
- However, any material transactions and events that are not recorded because they do not meet the measurability criteria may need to be disclosed in the financial statements’ supplementary notes to help users understand the entity’s financial performance and position.
Money Measurement Concept in Accounting
- The main effect of the money measurement concept or monetary unit assumption is that business assets to which a monetary value cannot be reasonably attributed (e.g., workforce skill) are typically ignored in financial statements, despite the fact that those assets may be of great value to the business.
- For better understanding and communication to financial statement users, transactions and events must be measurable in monetary units. It is easier for users to conduct analysis, comparisons, and economic decisions when transactions are translated or given a “value” in money. It’s also known as the monetary unit assumption for the same reason.
- In order to be recognized in the financial statements, the entity must not only be able to quantify the events and transactions, but also have the framework to monetize the transactions in local currency (or any other selected currency). Any event or transaction that cannot be monetized is ineligible for recording.
- As a result, qualitative information such as employee motivation, management effort, labour skill, and customer loyalty cannot be recorded as assets or otherwise in financial statements.
- Money measurement is one of the four essential accounting assumptions, along with economic entity, going concern, accruals, and time period, and it varies depending on the accounting framework.
Money Measurement Concept in Accounting- The concept of money measurement is intertwined with other accounting concepts such as the concept of a stable measuring unit and the historical cost accounting approach. To some extent, the concept of money measurement is part of the concept of a stable monetary unit, which is a necessary assumption when preparing financial statements. Two concepts are defined and detailed separately in this course for better understanding.
Example of Money Measurement Concept in Accounting
Assume a company has $100,000 in cash, 300 kilograms of raw material, three trucks, and 20,000 square feet of land, among other things. It is impossible to add these figures and come to a meaningful conclusion. However, if we express the above items in monetary terms, we can draw a conclusion.
Assume a company has one lakh in cash, 50,000 in raw materials, 7,000 trucks, and 20,000 acres of land. We can now add it all up and quickly determine what the company owns. Simply put, only record transactions in books of accounts that are expressed in monetary terms.
Limitations of Money Measurement Concept in Accounting
Money Measurement Concept in Accounting- When it comes to preparing an accounting report, the money measurement concept has significant limitations. Accounting ignores qualitative factors such as a strained relationship between the sales manager and the production manager, the CEO’s illness, the introduction of a new product by a competitor, and so on.
Money Measurement Concept in Accounting- Accounting, in simple terms, does not provide a true and fair picture of what is happening inside and outside the organisation. As a result, whoever is reading the accounting focuses solely on the profit numbers rather than the reasons for them.
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