Money Measurement Concept

Numerous transactions constitute business. The identification, recording classification, and summarization of these transactions requires a common unit of measurement. Money serves as the common denominator in measuring these transactions. In financial accounting, a record is made only of information that can be expressed in monetary terms. If events cannot be quantified in monetary terms then they do not facilitate accounting. The activities and their attributes will be based on the yardstick - whether they are amenable to be translated in currency terms. Money is the standard of exchange and the changes in purchasing power caused by inflation are ignored for the purpose of accounting because of the assumption about stability of money, for ensuring a smooth accounting process. Hence, all the transactions are recorded through a common denominator, namely the monetary unit. Thus, if a certain event, no matter how significant for the health or even existence of the business, cannot be measured in monetary terms, such event is not recorded in the books of accounts. For example, the death or retirement of the Chairman of a company, even if it has far reaching consequences for the health of the business is not accounted for, since no monetary measurement of the event is feasible. Also, to assess the financial health of the business, the assets and liabilities of the business need to be expressed in monetary terms. If the different assets and liabilities of the business are expressed in different units of measurement, it becomes difficult to compile and discern the financial health of the business. However, the money measurement concept gives rise to the following limitations:

    Non-monetary events and transactions however important, which cannot be expressed in terms of money, are to be excluded from accounting. Hence, the users of the financial statements need to keep in mind this aspect and cannot expect to get a complete picture of the business from Accounting records.

    Money, as a unit of measurement, has its own limitations. It serves as a common denominator only if there are no significant changes in its purchasing power. In reality, fluctuations in the prices result in fluctuations in the purchasing power of money. As a result, the financial statements fail to represent the fair and true picture of the affairs of the business.