Money Measurement Concept

  • The concept of money measurement states that only those transactions and happenings in an organisation which can be expressed in terms of money such as – sale of goods or payment of expenses or receipt of income, etc. are to be recorded in the book of accounts.
  • All such transactions or happenings which can not be expressed in monetary terms, for example, the appointment of a manager, capabilities of its human resources or creativity of its research department or image of the organisation among people in general do not find a place in the accounting records of a firm.
  • Another important aspect of the concept of money measurement is that the records of the transactions are to be kept not in the physical units but in the monetary unit.
  • For example, an organisation may, on a particular day, have a factory on a piece of land measuring 2 acres, office building containing 10 rooms, 30 personal computers, 30 office chairs and tables, a bank balance of Rs.5 lakh, raw material weighing 20-tons, and 100 cartons of finished goods.
  • These assets are expressed in different units, so can not be added to give any meaningful information about the total worth of business.
  • For accounting purposes, therefore, these are shown in money terms and recorded in rupees and paise.
  • In this case, the cost of factory land may be say Rs. 2 crore; office building Rs. 1 crore; computers Rs.15 lakh; office chairs and tables Rs. 2 lakh; raw material Rs. 33 lakh and finished goods Rs. 4 lakh.
  • Thus, the total assets of the enterprise are valued at Rs. 3 crore and 59 lakh.
  • Similarly, all transactions are recorded in rupees and paise as and when they take place.
  • The money measurement assumption is not free from limitations.
  • Due to the changes in prices, the value of money does not remain the same over a period of time.
  • The value of rupee today on account of rise in prices is much less than what it was, say ten years back.

Why different items in Balance Sheet recorded at different values-

  • Therefore, in the balance sheet, when we add different assets bought at different points of time, say building purchased in 1995 for Rs. 2 crore, and plant purchased in 2005 for Rs. 1 crore, we are in fact adding heterogeneous values, which can not be clubbed together.

Why Accounting Data does not reflect True and Fair View of the Affairs-

  • As the change in the value of money is not reflected in the book of accounts, the accounting data does not reflect the true and fair view of the affairs of an enterprise.

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