There are three basic types of accounts in the money measurement concept in accounting that comprise real account, personal account, nominal account.
What is Money Measurement Concept in Accounting?
When it comes to the money measurement concept in accounting, it refers to an important accounting principle which theorises that an entity must record only those transactions which can be measured and expressed in monetary terms on the books of accounts.
Therefore, it is not allowed to keep records of non-quantifiable factors like customer service, intangible assets, market share, etc. To know about MMC in further detail, keep reading.
What Do You Mean by Money Measurement Concept in Accounting?
The money measurement concept or measurability concept in accounting means recording monetary transactions in a systematic way. While recording them, the accounting transactions that have no monetary value are not taken into account. In other words, it is an important accounting concept asserting that an entity should record only those transactions which are conveyed in terms of money.
This indicates that accounting transactions only focus on quantitative information, instead of qualitative information. This is why, in the MMC model, plenty of items in the accounting records of an entity are not exhibited in its financial statements. Some of those elements which cannot be noted down as accounting transactions comprise:
- Employee skill level
- Expected resale value of a patent
- Employee working conditions
- Product durability
- Quality of customer support or field service
- Value of an in-house brand
- Efficiency of administration
All of these above-mentioned factors are not displayed in a business’s finances since they do not cause any impact on income, expenditures, assets, or liabilities and do not possess any monetary value in accounting.
What Are the Characteristics of the Money Measurement Concept?
The idea or principle of money measurement has the following attributes:
- It offers money as the common denominator for performance measurement.
- Just the commercial operations that can be regarded as having a monetary value will be documented.
- It is simpler to communicate between business management and shareholders when the financial worth of business results is presented.
- This idea assumes that money is a constant unit of measurement and does not take the inflationary impact of transactions into account.
What Is the Importance of the Money Measurement Concept in Financial Accounting?
Money is used as the recording medium for transactions involving assets, obligations, losses, income, and capital. It becomes useful in presenting the balance sheet and profit and loss statement. With the money measurement concept in accounting, business and company valuation calculations are made simpler because it only considers transactions that were documented in monetary terms.
To obtain a precise financial figure, the cost can be assigned to appropriate structures, equipment purchased, and hardware used in a business. The value of the organisation can also be calculated by adding all such items and deducting the value of its liabilities.
Examples of Money Measurement Concept in Accounting
Following are three notable examples of the money management concept in accounting:
Example 1: The employees in an organisation whose skills and aptitudes contribute to the growth and development of their company cannot be jotted down on their financial statements and balance sheets. This is because the skill of a human person cannot be measured in monetary terms. Conversely, the employees' transactions, like salary expenses, pension, debts, etc., can be determined in terms of money and so they are entered into the company’s balance sheet.
Example 2: General Motors was carrying out its performance efficiently until March 2020, when it suffered a major setback due to the spread of COVID-19 and the government's declaration of lockdown for three to four months. During that period, General Motors' sales dropped considerably since no automobiles were sold. This caused the company to suffer an immense loss which cannot be recorded in their financial statements. However, this unforeseen event was clearly displayed in their balance sheet.
Example 3: The working culture, office atmosphere, preventive measures to avert risk factors in a business entity, etc., are needed for the qualitative advantage of a company but cannot be assessed in terms of quantity. This is why they impact an entity's financial behaviours indirectly, so they should not be recorded.
What Are the Advantages of the Money Measurement Concept in Accounting?
Mentioned below are some notable advantages of money measurement concept in accounting:
- This method helps in combining all business-based transactions over an accounting period in order to figure out a business’s profitability.
- MMC helps to compare the performance of a business for two diverse periods. Furthermore, you can compare the performance of two firms as well.
- MMC helps proficient accountants to compare one business entity with another based on the representation of financial terms.
- The money measurement concept in accounting helps a business avoid considering its own asset values. This way, the chances of recording wrong information in the financial statement reduces by a considerable margin. Additionally, it enables you to view a comprehensive financial analysis of the company.
- Income statements, balance sheets alongside profit and loss statements are formulated effortlessly due to the simplicity of recording monetary transactions.
- MMC streamlines business valuation as only those transactions that can be expressed in monetary terms are taken into account.
- This concept enables an organisation to set the price of a structure, machinery, and equipment which it utilises for business.
What Are the Limitations of the Money Measurement Concept in Accounting?
In addition to the advantages, there are several limitations of money measurement concept in accounting as well, which include:
- There are various factors that result in long-term changes in an organisation since they are not recorded properly.
- Several benefits of a business that are not properly recorded in the book of accounts may affect the long-term aptitude of a business to generate substantial profits.
- Non-financial transactions which cannot be recorded in the business's financial statement may hamper the valuation of assets that are needed in future.
- MMC does not keep a record of inflation impact, and thus it causes an inaccuracy in the finances of the company.
Exceptions to Money Measurement Concept in Financial Accounting
There are plenty of exceptions regarding the money management concept in accounting alongside different types of transactions which might not be documented in monetary terms.
- These types of examples comprise skill set, employee quality, and qualification. This is because you cannot determine an employee's quality or skill set in monetary terms.
- In addition, factors such as product quality and the nature of services would not be assessed in terms of money.
- Several other factors, such as shareholders' satisfaction level, the effectiveness of administration, and employees, are also considered under the exceptions of the MMC principle.
- Last, of all, the leading factor comprises the safety measures which are adopted by a business to avoid unforeseen situations, which cannot be expressed in terms of money but they have a great importance for an organisation’s growth and well-being.
Now, having a crystal-clear idea about the money measurement concept in accounting will help you make your financial decisions with more diligence. MMC helps in formulating financial statements of a business. So, if you own a business this concept will help you figure out the ups and downs of its finances and plan for the future.
FAQs About Money Measurement Concept in Accounting
The money measurement considerations do not take into account the inflation factors affecting previous budgets. Also as the evaluators skip several parameters the final financial statements do not necessarily represent the actual financial standpoint of an organisation.
According to this idea, a business should only keep track of transactions that have a monetary value. The financial accounts do not include any non-quantifiable transactions or events.
The five principles of money management in accounting comprise timeliness, consistency, certification, justification, and documentation.
Other Important Guides About Wealth Management
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