Understanding the money measurement concept

What is the Money Measurement Concept?

In the accounting field, the money measurement concept means that a company should keep track of only those transactions that can be reflected or expressed in terms of money on a financial statement. The purpose of this concept is to ensure that costs are accurately reflected in financial statements.

This is an extremely crucial process of measuring the value of goods and services exchanged between two parties. The standard practice is to assign a value in terms of money to each good or service. This value may be expressed in terms of a price per unit (purchase price), an exchange rate between two currencies, or some other measure. This is a systematic process that involves recognizing, measuring, recording and reporting transactions in terms of monetary value. In accordance with this concept, if a transaction cannot be reflected monetarily then it is not recorded in the financial statements

Why is the money measurement concept important?

The money measurement concept is so effective and widely used because it uses money as the common unit while recording any business transactions concerned with profit, loss, income, assets, liabilities and capital. Due to this, recording transactions becomes extremely easy while preparing profit and loss statements or balance sheets or any other financial statements.

When is the money measurement concept not applied?

While measuring the following parameters the money measurement concept is not applied:

  • The quality of products
  • The quality of services
  • The efficiency of management or administration in a company
  • The skill set of an employee
  • The effort put into the safety measures in a factory or a warehouse
  • The satisfaction level of the stakeholders

Benefits of the money measurement concept

  • Easy maintenance of business-related records
  • Quick preparation of financial statements
  • Facilitates easy separation of accounting periods
  • It ensures all financial transactions are accounted for. Hence if the money measurement concept is applied properly then even the smallest of financial transactions like grn (goods received note) or credit and debit notes aren’t overlooked.
  • Makes analysis of the financial health of the company extremely easy. This in turn makes it extremely easy for business owners, investors and other stakeholders to strategize for improving the business. In fact, most investors demand that the money measurement principle be applied so they can get accurate estimates of how the business they have invested in is performing
  • The process of business evaluation becomes extremely easy with this accounting methodology.

Disadvantages of the money measurement concept

  • It overlooks non-monetary aspects of the business like the quality of products or the satisfaction of customers. Hence the financial or budget forecasts made purely on the grounds of records prepared after following the money measurement concept may not be entirely accurate.
  • It doesn’t take into account the effects of macroeconomic policies of the government like inflation. Hence it overlooks the crucial fact that the value of money changes over time which in turn impacts the value of every business transaction.