Which concept requires that those transactions which can be expressed in terms of money should be recorded in the books of account?

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

Following are some of the characteristics of the 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

Following are some of the advantages of the 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

Some of the limitations of the money measurement concept are as follows:

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

This was all about the topic of Money Measurement Concept, which is an important topic of Accountancy for Commerce students. For more such interesting articles, stay tuned to BYJU’S.

May 13, 2022/ Steven Bragg

The money measurement concept states that a business should only record an accounting transaction if it can be expressed in terms of money. This means that the focus of accounting transactions is on quantitative information, rather than on qualitative information. Thus, a large number of items are never reflected in a company's accounting records, which means that they never appear in its financial statements. Examples of items that cannot be recorded as accounting transactions because they cannot be expressed in terms of money include:

• Employee skill level

• Employee working conditions

• Expected resale value of a patent

• Value of an in-house brand

• Product durability

• The quality of customer support or field service

• The efficiency of administrative processes

All of the preceding factors are indirectly reflected in the financial results of a business, because they have an impact on either revenues, expenses, assets, or liabilities. For example, a high level of customer support will likely lead to increased customer retention and a higher propensity to buy from the company again, which therefore impacts revenues. Or, if employee working conditions are poor, this leads to greater employee turnover, which increases labor-related expenses.

Problems with the Money Measurement Concept

The key flaw in the money measurement concept is that many factors can lead to long-term changes in the financial results or financial position of a business (as just noted), but the concept does not allow them to be stated in the financial statements. The only exception would be a discussion of pertinent items that management includes in the disclosures that accompany the financial statements. Thus, it is entirely possible that the key underlying advantages of a business are not disclosed, which tends to under-represent the long-term ability of a business to generate profits. The reverse is typically not the case, since management is encouraged by the accounting standards to disclose all current or potential liabilities in the notes accompanying the financial statements. In short, the money measurement concept can lead to the issuance of financial statements that may not adequately represent the future upside of a business. However, if this concept were not in place, managers could flagrantly add intangible assets to the financial statements that have little supportable basis.

May 13, 2022/ Steven Bragg/