Money measurement concept

Money measurement concept is "the accounting convention which holds that accounting should only deal with those items which are capable of being expressed in monetary terms". The money measurement concept assumes that all transactions which can be expressed in monetary terms should be recorded in the accounting books. This is due to the fact that money is the basic carrier of value and the means of exchange between entities.

Monetary concept allows to standardize accounting entries by using monetary terms. This allows clearer bookkeeping and easier comparison of business results, for example for two periods or two companies.

Money measurement concept is one of basic accounting concept next to entity concept.

Criticism of money measurement concept

The adoption of money as a medium for expressing the value of various business resources of the company allowed for the unification of accounting entries. Money as a medium of value works well in most accounting items. However, there are resources of an enterprise whose credible expression only in monetary units is difficult or almost impossible. These include inter alia brand value, company's reputation, location, quality of workforce or quality of management. Some of these resources, due to their nature, may even be excluded from the financial statement of the company. A strictly monetary approach to accounting may therefore not fully reflect the true value of the enterprise.

In addition to the omission of non-monetary enterprise values, this approach does not take into account the changing purchasing power of money. This is important because the change in the level of prices affects the change in the value of individual resources of the company.

Other accounting concepts:

• Accounting period concept,
• Accrual concept,
• Cost concern concept,
• Dual aspect concept,
• Going concern concept,
• Matching concept,
• Objective concept,
• Realization concept,
• Separate entity concept.

Examples of Money measurement concept

• The Money Measurement concept is used to measure the financial performance of a business. It is based on the idea that financial statements should only include transactions and events that can be expressed in monetary terms. This means that non-monetary items, such as goodwill, intellectual property, or even customer relationships, are not included in the financial statements.
• The Money Measurement Concept is also used to measure the value of assets. For example, the value of a building can be determined by its purchase price, the cost of any improvements, and the amount of depreciation that has been applied to it.
• The Money Measurement Concept is also used to measure the income of a business. This can be done by calculating the amount of revenue generated from sales of goods or services, and then subtracting the costs of producing these goods or services. This will give the business an accurate measure of its net income.

Advantages of Money measurement concept

The Money Measurement Concept is an important accounting convention which holds that accounting should only deal with those items which are capable of being expressed in monetary terms. The main advantages of this concept include:

• It provides a common language for businesses to communicate financial information in a consistent and meaningful way.
• It allows for easier comparison of financial information across different businesses and sectors.
• It enables easier reporting of financial information to external stakeholders such as investors, creditors and suppliers.
• It provides a framework for recording, measuring and reporting financial information in a standardized and consistent manner.
• It simplifies and standardizes the financial reporting process, making it easier for companies and investors to interpret financial statements.

Limitations of Money measurement concept

The Money measurement concept has a few limitations:

• It fails to capture the value of intangible assets such as goodwill, brand equity and intellectual property.
• It does not account for opportunity costs, which are the costs incurred by not choosing a certain course of action.
• It does not factor in changes in value due to inflation.
• It ignores social, environmental and externalities, making it difficult to measure the overall impact of a certain action.
• It only measures value at the time of transaction, rather than the potential future value of a given asset.

Other approaches related to Money measurement concept

The Money measurement concept is an accounting convention that holds that accounting should only deal with those items which are capable of being expressed in monetary terms. Other approaches related to this concept include:

• Objectivity: This approach states that accounting information should be objective, verifiable, and free from bias.
• Conservatism: This approach assumes that all assets are reported at lower values rather than higher values until there is evidence of a higher value.
• Matching: This approach requires that all expenses related to a particular sale be recognized in the same period as the revenue from the sale.
• Going Concern: This approach assumes that a business will continue to operate in the future and not be liquidated.

In summary, the Money measurement concept is an accounting convention that holds that accounting should only deal with those items which are capable of being expressed in monetary terms. Other approaches related to this concept include objectivity, conservatism, matching, and going concern.

Footnotes

Money measurement concept — recommended articles

Cost principle — Accounting concepts — Micro Accounting — Accrual method — Going-concern value — Matching principle — Asset based approach — Creative accounting — Periodicity concept

References

• Atrill P. & McLaney E. & Harvey D., (2015), Accounting: An Introduction, Pearson Australia, Melbourne,
• Atrill P. & McLaney E. & Harvey D., (2013), Accounting for Business, Routledge, London & New York,
• Griff M., (2014), Professional Accounting Essays and Asignments, Lulu Press,
• Mohana Rao P., (2012), Fundamentals of accounting for CPT, PHI Learning Private Limited, New Delhi,
• Tulsian P.C. & Tulsian B., (2014), Financial Accounting for B. Com (Programme), S. Chand Publishing, New Delhi.

Author: Wojciech Musiał