Explain Money Measurement Concept?
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Explanation:
The money measurement concept (also called monetary measurement concept) underlines the fact that in accounting and economics generally, every recorded event or transaction is measured in terms of money, i.e., the local currency monetary unit of measure. Using this principle, a fact or a happening or event which cannot be expressed in terms of money is not recorded in the accounting books. Thus, it is not acceptable to record such non-quantifiable items as employee skill levels or the quality of customer service.
One of the basic principles in historical cost accounting is "The Measuring Unit principle" (or stable measuring unit assumption): The unit of measure in accounting shall be the base money unit of the most relevant currency.
This principle also assumes the unit of measure is stable; that is, changes in its general purchasing power are not considered sufficiently important to require adjustments to the basic financial statements.The inflation which occurs over the passage of time is not considered.
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Answer:
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:
1) Employee skill level
2) Employee working conditions
3) Expected resale value of a patent
4) Value of an in-house brand
5) Product durability
6) The quality of customer support or field service
7) 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.
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 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 of a business 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.
Explanation: