The money measurement concept states that a corporation should only report those accounting transactions that can be represented in terms of money.
It means that the focus of accounting transactions is on quantitative data rather than qualitative information. A high number of items are never reflected in a corporation’s accounting records, which suggests that they never appear in its financial statements, such as the income statement or balance sheet.
Money measurement is the measurement of assets, liabilities, equity and the other financial resources of a business, including assets, liabilities, equity and other financial resources (including cash and cash equivalents) in terms of money or financial value. The objective of money measurement is to estimate these resources’ value and evaluate the changes over time.
Measurements of the financial resources and the performance of an organization are necessary to determine a firm’s viability, profitability, and other financial information. It is the basis of accounting for business and for business decisions.
It would be impossible to record information in financial records without a currency amount. Also, stakeholders could not make financial decisions due to the lack of comparability measurements between companies. This concept disregards the impact of inflation on the dollar’s purchasing power.
The objective of the Money Measurement Concept
The objective of the money measurement concept is to ensure that financial statements reflect only those transactions that can be measured in terms of money. This concept is important because it ensures that financial statements are based on transactions that can be objectively measured.
It measures the organisation’s performance, the economic value of the products, services and other factors and the changes in these factors over time.
Assumption Behind Money Measurement Concept
This concept is based on the presumption that all transactions can be estimated in monetary terms. Another significant feature of this concept is an assumption about the resistance of the value of the monetary unit.
While, in actuality, inflation appears in the erosion of the value of a monetary unit, accounting documents are based on the assumption that a monetary unit has a stable & permanent value.
The statement that the business of garments was started with Rs. 80,000 cash and 40,000 meters of silk cloth is insignificant & fails to explain to us the capital of the business. If the value of 40,000 meters of silk cloth is determined to be Rs. 2,00,000, we can reliably believe that the business was commenced with Rs. 80,000 + 2,00,000 = 2,80,000, which will be significant.
In accounting, the monetary measurement concept is a way of looking at money as a measure of value. In other words, it is a comparative statement that states the lesser amount as being more valuable than the greater amount. The two types of monetary measurements are those translated to an equivalent number and those that have not been translated to an equivalent number. The first type may be called equivalence measurement, and the second may be called non-equivalence measurement.