Money management concept is used by companies while recording business related transactions. The concept disallows companies from recording any transaction that cannot be expressed in money. While this simplifies the comparison of business performance, many important non-quantifiable metrics are left out of financial statements.
In this article, we will be discussing the importance of the money measurement concept, its features, advantages and disadvantages. We will also discuss the foundation of the concept through the course of this article,
Table of Contents
What is the Money Measurement Concept?
In accounting and economics, money measurement or monetary measurement concept is followed. This concept states that a business should record only those transactions that can be measured in monetary terms. Any non-quantifiable transactions and events are not recorded in the financial statements. It focuses on quantitative data instead of qualitative data in accounting transactions.
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These parameters are recorded in the books of accounts since they are expressed in terms of money. These include the following:
- Pension obligations
- Salary expenses
- Purchase of machinery
- Cash outflow and inflow in terms of the money
- Other office costs
Non Quantifiable Parameters
The concept of money measurement in accounting disallows recording non-quantifiable parameters. While these items are not directly recorded in any financial statement, their impact is still recorded. The reason behind this indirect recording is that these parameters impact the company’s revenues, profits and losses. It is, therefore, important to know about the items or factors that are not recorded.
- Employees’ skills and working conditions
- Behaviour of employees
- Satisfaction level of employees, investors, and stakeholders
- The expected resale value of any patent
- Safety measures adopted by the company
- In-house brand value
- Product quality and durability
- Quality of customer support service
- Customer feedbacks
- Administrative process efficiency
Basis of the Concept of Money Measurement
This concept is based on ‘The Measuring Unit Principle’ which is one of the basic principles in historical cost accounting. This principle states that business transactions should only be recorded when it is possible to express them in terms of currency. The reason for this statement is that the principle assumes the unit of measure to be stable. Here the unit of measure is the base money of the most relevant currency.
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Features of the Money Measurement Principle
The concept of monetary measurement has the following features:
- Money is the key metric for assessing the financial situation of a company.
- Accountants get guidance about the parameters that should and should not be recorded.
- It does not consider the impact of inflation into consideration while recording transactions.
- Only the nominal value of money is considered in the monetary measurement concept.
- It ignores the shifting purchasing power of money.
Advantages of Concept of Money Measurement
The following are the advantages of the money measurement concept:
- Accountants can easily compare one business with another due to the representation of parameters in monetary terms.
- It is possible to combine every business transaction for an accounting period to determine the profitability of a business.
- Companies can avoid including the value of their own items such as assets. This prevents the inclusion of false information in the statement. This helps in getting a more accurate analysis of the financial situation of the company.
- Balance sheet, income statements and profit, and loss statements can be easily prepared due to the ease of recording these transactions.
- It helps in comparing business performance for two different periods. The comparison can be for the same firm as well as for two different firms.
- The concept simplifies business valuation since only those transactions are considered that are expressed in monetary terms.
- Companies can easily assign price to a structure, machinery purchased, and equipment that it uses for the business.
Limitations of Money Measurement Concept
While we have discussed the advantages, the following are the disadvantages of this principle of money measurement:
- Due to this concept of money measurement, many facts, events, and items are not mentioned in the accounting records of a company. This leads to the absence of these events and items on the financial statements as well.
- Since companies do not include all the parameters, financial statements cannot accurately represent the financial position of the company.
- Inflation impacts the value of money due to which it becomes an important factor to be considered. However, this principle does not record the inflation impact, which leads to an inaccurate portrayal of the company’s finances.
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The money measurement principle is important for professionals who are involved in financial statement analysis. This concept does not allow the recording of non-quantifiable parameters. However, management can still include specific parameters that have a significant, consistent, and long-lasting impact on quantifying parameters. It is essential to understand this concept to properly analyse the financial health of the company.
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