Updated July 20, 2023
Introduction of Money Measurement Concept
The money measurement concept is an accounting concept based on the principle that a business should record only suchoccurring transactions and events which have the capability of being measured in monetary terms i.e.at a transaction price which is equivalent to cash outflow/ inflow in terms of money, measurable in the currency unit used of that particular country to provide quantitative information rather than qualitative information.
The money measurement concept which is also known as the measurability concept states that during accounting for all events and transactions, one should understand whether any event is capable of being recording in monetary terms in which are capable of being priced or measured in money value. Only transactions having such capability should be recorded and accounted while in case if it is not possible to assign a monetary value to a transaction, such an event should not be recorded in the book of accounts. However, as per applicable statutory norms, those events may need to be disclosed in the supplementary notes of accounting statements to help users in better understanding the financial position and performance of the entity.
Examples of Money Measurement Concept
Following are the examples are given below:
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 an in 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.
The working atmosphere, office culture of the organization, safety measure 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.
General Motors was performing well till March 2020 but one day due to the spread of Covid-19, the government announced complete lockdown for three months. In these three months, the sale of General 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.
Criticism of Money Measurement Concept
Money is adopted as a medium of value in most accounting items. However, there are many entities whose resources are not incredibly expressed in terms of money and does not have quantitative value. Rather certain attributes that a company posses such as quality of the workforce, management, office culture, company reputation, and location adds up in multifold benefit to the company but is not recorded in the book of accounts as these do not possess monetary value. Also, the money measurement concept does not take into account the changing purchasing power of money as a change in the level of prices affects the value of an individual company’s resources. This shows that the money measurement concept is not enough to reflect the true value of the enterprise.
Importance of Money Measurement Concept
Since 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. Business and company valuation calculation becomes easier with money measurement concept as it takes into account only the transactions recorded in monetary terms. The cost can be attributed to a building, equipment purchased, the hardware used in a company to get a meaningful monetary figure. Summation of all such items reduced by value of its liabilities will give up the organization’s value. Many business transactions are recorded on the assumption that money does not change its value too often.
Advantages of MMC
Some of the advantages are given below:
- MMC helps in maintaining business records. All monetary transactions that take place in an entity are recorded.
- Money measurement concept helps in the preparation of financial statements.
- As all the transactions are recorded it becomes easier to compare the results of one period to another.
- It forms a basis of evidence in legal matters.
- The shareholders and investors get enough information about the company’s progress which help them in making out exact inference regarding their investment.
- The taxation related queries and matters get easily comprehended.
- Business valuation becomes easy as money invested and lost is properly calculated.
Limitations of MMC
Some of the limitations are given below:
- 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.
- There are many factors that contribute to long term changes in an entity that are not accounted for.
- 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.
- 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.
The money measurement concept is a measurability concept that helps in preparing and presenting financial statements of the company, but it may not adequately represent and forecast the ups and downs of a business and the uncertainties that may prevail in the future. Although it possesses some demerits all of them can be overcome. Today all the business entities throughout the world use this concept to record and present its accounting transactions.
This is a guide to Money Measurement Concept. Here we also discuss the introduction to Money Measurement Concept along with criticism, importance, advantages and limitations. You may also have a look at the following articles to learn more –