Certain specific transactions of a company can be expressed or measured in terms of money on the financial account statements. The monetary measurement concept states that a company will only record these transactions, which can be measured in terms of account statements, and it is an essential accounting concept. The transactions which cannot be expressed in monetary terms should not be recorded during any financial transaction recordings. Measurability concept is another name given to the money measurement concept.
Any transaction price which is equally measurable in a particular country’s currency unit to provide quantitative analysis rather than any qualitative documentation should be recorded. Any other transaction which is measurable in terms of cash inflow and outflow also needs to be recorded for a company.
What is the Money Measurement Principle?
The principle of the money measurement concept in accounting states that for all transactions and events, one should separate those events which can be priced and are measured in terms of monetary needs. If an event or transaction cannot be assigned a particular monetary value, then such transactions should not be recorded in the book of finance or any accounting records. You need to understand the importance of the money measurement concept better in order to understand the performance and financial position of a company. Supplementary notes of the accounting statements should not record any transactions which do not have a money value. It is done as per regulations to avoid excessive confusion amongst accounts executives.
Why Do We Need Money Measurement Concept?
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Money is the common unit of transaction recording elements such as profit, loss, income, assets, capital, and other liabilities of a business. The importance of the money measurement concept lies in the fact that business transactions can be easily presented and recorded into financial statements such as balance sheets, income statement sheets, profit and loss statements, or cash flow projections using such concepts. Other characteristics of the money measurement concept include that it considers money as a common ground for the performance measurement of a company.
As already stated, it only records those transactions, which can be stated in terms of cash projections. Communication between stakeholders and management becomes easier when we present the business values in terms of money. The inflation impact is not taken into account in the transaction recording process. All the above reasons make the money measurement concept in accounting one of the most important financial concepts.
Exceptions to Money Measurement Concept
There are many exceptions to the Money Measurement Concept or transaction examples that may not be recorded in terms of money. Such examples include employee quality, skill set, and qualification. You can never measure the skill set of an employee in terms of money. Again things like service and product quality cannot be compromised and cannot be measured in terms of money as well.
Other factors like administration efficiency, stakeholders’ satisfaction level, and employees are also exceptions to the Money Measurement Concept. Lastly, the biggest factor is the safety precautions that a company takes to prevent any hazardous situation which cannot be measured with monetary transactions but are extremely important for the company’s healthy well-being.
Limitations of Money Measurement Concept
There are plenty of non-monetary transactions or events that often leave a significant amount of impact on the business. But the money measurement concept in accounting does not take these transactions into account as per statutory rules. The inflation due to historic costs creates a huge impact on a business which is very swiftly ignored by the Money Measurement Concept. All of this can create a gap or bridge in the accounting and management sector. These are the major limitations of the money measurement concept.
Advantages of Money Measurement Concept
A track record of all the business transactions is maintained that have a particular monetary value and are not misplaced. Financial statements such as income statements, profit and loss statements, and balance sheets can be easily prepared by keeping a record of these transactions. Furthermost, two separate accounting periods can be compared to understand the growth of the company if these financial records are maintained properly.
Investors can easily know the status of the investment by accessing these financial records from time to time. A company can compare its financial record from time to time or can even compare it with other companies to understand their current status in the market. Above, we have tried to specify some of the major advantages of the Money Measurement Concept, but apart from the ages we haven't spoken about plenty of advantages.