What is Money Measurement Concept: Meaning, Advantages and Exceptions

source: taxfoundation

If you are running a business, you must record all the business activities. It includes compiling all the relevant data and creating reports based on these data.

However, while recording such transactions, you should consider the recording of monetary values. Through this, you can analyse the monetary transaction you have done. In this article, we will discuss the money measurement concept, its characteristics, and how it will benefit you.

The money measurement concept is an important accounting principle. It states that businesses should record only those transactions which can be expressed or measured in monetary terms on a financial statement.

This concept, also known as the Measurability concept, ensures that while recording all the transactions and events, it can be easily measured in terms of monetary value. You must not record those transactions or events that cannot be measured in monetary terms.

The following are the main characteristics of a money measurement concept:

• It records only transactions that you can measure in monetary value.
• Money acts as a common parameter while measuring the performance of a company.
• While recording transactions, it does not consider the impact of inflation.
• It provides easy communication between the management and stakeholders as the values are monetary.

Money is the standard unit for recording assets, liabilities, income, capital, and loss. It helps you prepare the Profit and Loss Account and the Balance Sheet for a particular financial year.

Through this concept, business valuation calculation becomes easier as it records only monetary transactions. This includes purchased equipment and assets used, which you can easily measure in monetary terms. Thereby, by summing up the values of its assets and liabilities, you will get the business valuation.

There are certain exceptions to a money measurement concept that cannot be recorded regarding monetary values. Such exceptions include employee quality and skill set, the efficiency of the administration, the quality of the product or service, and the satisfaction level of the employee and stakeholders. It also includes safety measures of the company to prevent any kind of hazards.

You can never measure these exceptions in terms of money, and they cannot be compromised. They are significant for the well-being of a company.

Pros of Money Measurement Concept

The following are some of the advantages of the money measurement concept:

• Tracking of Transactions: This concept lets you track all the monetary transactions you have done commercially. It helps you to analyse where you are spending and earning more.
• Creating Income Reports: The money measurement concept is fundamental while preparing the income report. With its help, you can analyse how much you have earned throughout the financial year.
• Comparing Reports: When the financial transactions are recorded appropriately, you can easily compare the financial statements of two separate accounting terms. This helps you determine which segment you need to catch up with or improve from the previous report.
• Sufficient Data for Development: It helps the investors and shareholders receive sufficient data for the company's development. You can draw exact calculations about the company's investments through this data.

Cons of Money Measurement Concept

The following are a few limitations of the money measurement concept:

• Inaccurate Assessments: This concept does not allow you to record those non-monetary transactions that benefit the organisation monetarily. It does not provide a clear picture of what is happening in the organisation apart from the numbers.

• Impact of Inflation: It ignores the impact of inflation while recording monetary transactions. So, in this case, the accounting ledgers will not show accurate results relating to the business expansion.

The following is the money measurement concept example that will help you understand better:

Suppose you have a company with sales of ₹2,00,000, raw materials purchased ₹1,00,000, rent paid ₹75,000 etc. are expressed in monetary values. So you can record these values in the accounts book. However, you cannot record employees' loyalty, sincerity and honesty in your accounts books. You cannot measure these in monetary terms, although they influence your business profits and losses.