Money Measurement Concept: Keeping Track of Business in Currency Terms
The money measurement concept states that all business transactions should be recorded using the currency of the country, such as rupees in our case. According to this concept, only transactions that can be expressed in terms of money are recorded in the company's books.
For example, when a company sells goods worth Rs. 200,000, purchases raw materials for Rs. 100,000, or pays rent of Rs. 10,000, these transactions are recorded because they involve money. However, aspects like employee loyalty or honesty, which cannot be measured in monetary terms, are not included in the books.
Another aspect of this concept is that records are maintained in monetary units rather than physical quantities. For instance, if a company owns assets like a factory on a 10-acre land, an office building with 50 rooms, 50 computers, and 100 kg of raw materials, their values are recorded in rupees. Instead of specifying the quantities, their monetary worth is documented.
For example, the factory land may be valued at Rs. 12 crore, the office building at Rs. 10 crore, the computers at Rs. 10 lakhs, the office chairs and tables at Rs. 2 lakhs, and the raw materials at Rs. 30 lakhs. In total, the company's assets amount to Rs. 22 crore and Rs. 42 lakhs in value. Only transactions involving money are recorded in the accounting books, while the quantities of items are not considered.
Key Significant of the Money Measurement Concept:
The money measurement concept is significant as it guides accountants on what to record and what to exclude.
It ensures consistent recording of business transactions and enhances the comprehension of financial accounts prepared by the company.
Moreover, it facilitates the comparison of business performance between different periods of the same firm or between different firms in the same period.