Money Measurement Concept

 

Money Measurement Concept

Money measurement concept is an important accounting concept that is based on the theory that a company should be recording only those transactions that can be measured or expressed in monetary terms on the financial statement.

Money measurement concept is also known as Measurability Concept, which states that during the recording of any financial transactions, those transactions should not be recorded which cannot be expressed in terms of monetary value.

Characteristics of Money Measurement Concept

1. It takes money as a common parameter for the measurement of performance of a company.
2. It records only those transactions that can be recorded in monetary value.
3. Presenting the value of business in monetary terms helps in ease of communication between management and the stakeholders.
4. It does not take into account the impact of inflation on the recording of transactions.

Importance of Money Measurement Concept

As money is regarded as a common unit of recording transactions related to the income, profit, loss, capital, assets and liabilities of a business, it becomes easier to record and present business transactions into the financial statements such as Profit and Loss statement and Balance Sheet.

Exceptions to Money Measurement Concept

Examples of transactions that cannot be recorded in monetary value

1. Employee skill set and quality
2. The efficiency of the administration
3. Product and service quality
4. Employee and stakeholders satisfaction level
5. Safety measures of the company in order to prevent any hazard.

Advantages of Money Measurement Concept

1. It helps in maintaining business records by recording all transactions that are having monetary value.
2. It is helpful in preparation of financial statements (such as Profit and Loss Statement, Income Statement)
3. As the financial transactions are recorded in a proper manner, it becomes easy when two separate accounting periods are compared.
4. It provides a clear picture of the financial transactions and state of the business which help in assessing the investors in knowing the status of their investment.

Limitations of Money Measurement Concept

1. It does not take into account the impact of non-monetary events on business.
2. It ignores the impact of inflation on historic costs.

Conclusion

With all the benefits and limitations, the money measurement concept provides a valuable contribution to financial accounting basics. It complies with the financial accounting concepts of monetary value measurements, keeping – record in a single book, and data presentation.

Author: Nazia Tabassum