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The money measurement concept stipulates that all business transactions must be expressed in monetary terms, using the currency of the relevant country.
In our case, transactions are recorded in rupees. According to this principle, only transactions that can be quantified in monetary terms are recorded in the financial accounts. Conversely, aspects such as employee sincerity, loyalty, and honesty, which cannot be measured in monetary terms, are not recorded, even though they impact business profitability.
Another element of the money measurement concept is that records of transactions are kept in monetary units rather than physical units. For example, an organization may own various assets: a factory on 5 acres of land, an office building with 5 rooms, 15 personal computers, 35 office chairs and tables, and 50 kg of raw materials. Although these are described in different physical units, they must be recorded in monetary terms for accounting purposes. The factory land might be valued at ₹2 crore, the office building at ₹5 crore, computers at ₹2 lakhs, office chairs and tables at ₹1 lakhs, and raw materials at ₹24 lakhs. Therefore, the total assets of the organization would be valued at ₹7 crore and ₹27 lakhs.
Only transactions that can be expressed in monetary terms are recorded in the accounts, and these are recorded in monetary units, not in physical quantities.
The significance of the money measurement concept includes:
It provides accountants with criteria for what should be recorded in the accounts.
It ensures the uniform recording of business transactions.
Expressing all business transactions in monetary terms makes it easier to understand the financial statements of the business.
It allows for the comparison of business performance over different periods for the same company or between different companies over the same period.
Read the next article to learn more about the Going concern concept.