Money Measurement Concept

only those transactions which can be measured in terms of money are recorded.Since money is the medium of exchange and the standard ecnomic value, this concept requires that those transactions alone that are capable of being measured in terms of money be only be recorded in the books of accounts

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In Financial Accountancy, a record is made only of the information that can be expressed in monetary terms. Recording, Classification and summarization of the business transactions requires a common unit of measurement which is taken as money. If the events cannot be quantified in monetary terms then they do not facilitate accounting. The activities and their attributes considered for inclusion in the financial statements will be based on the yardstick that whether they are amendable 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 purposes of accounting because the assumption about the stability of money, notwithstanding its limitations are recorded through a common denominator, namely the monetary unit. Thus if a certain event no matter how significant it may be for the health or even the existence of the business, cannot be measured in monetary terms, such an event is not to be recorded in accounting. For example: - Purchase of an inconsequential asset, which is easily measured in rupee terms, is easily accounted for in the business. However, the retirement or the death of the chairman of a company, even though it has far reaching consequences for the health of the business is not accounted for, since no monetary measurement of the event is possible. Needless to say, if different assets and liabilities are expresses in different measures, they cannot be compiled to discern the financial health of the business. This difficulty is obviated if all the assets and liabilities are expressed in money terms. The total liabilities when deducted from the total assets yield the net worth of the organization.

Accounting period Though accounting practice believes in continuing entity concept i.e. life of the business is perpetual but still it has to report the 'results of the activity undertaken in specific period (normally one year). Thus accounting attempts to present the gains or losses earned or suffered by the business during the period under review. Normally, it is the calendar year (1st January to 31st December) but in other cases it may be financial year (1st April to 31st March) or any other period depending upon the convenience of the business or as per the business practices in country concerned.

Due to this concept it is necessary to take into account during the accounting period, all items of revenue and expenses accruing on the date of the accounting year. The problem confronting this concept is that proper allocation should be made between capital and revenue expenditure. Otherwise the results disclosed by the financial statements will be affected.

Article Source: http://EzineArticles.com/585175 Stable Monetary Unit Accounting presumes that the purchasing power of monetary unit, say Rupee, remains the same throughout. For example, the intrinsic worth of one Rupee is same and equal in the year 1,800 and 2,000 thus ignoring the effect of rising or falling purchasing power of monetary unit due to deflation or inflation. In spite of the fact that the assumption is unreal and the practice of ignoring changes in the value of money is now being extensively questioned, still the alternatives suggested to incorporate the changing value of money in accounting statements viz., current purchasing power method (CPP) and current cost accounting method (CCA) are in evolutionary stage. Therefore, for the time being we have to be content with the 'stable monetary unit' concept.

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This concept is closely related to the going concern concept. According to this, an asset is ordinarily recorded in the books at the price at which it was acquired i.e. at its cost price. This 'cost' serves the basis for the accounting of this asset during the subsequent period. This' cost' should not be confused with 'value'. It must be remembered that as the real worth of the assets changes from time to time, it does not mean that the value of such an assets is wrongly recorded in the books. The book value of the assets as recorded do not reflect their real value. They do not signify that the values noted therein are the values for which they can be sold. Though the assets are recorded in the books at cost, in course of time, they become reduced in value on account of depreciation charges. In certain cases, only the assets like 'goodwill' when paid for will appear in the books at cost and when nothing is paid for, it will not appear even though this asset exists on name and fame created by a concern. Therefore, the values attached to the assets in the balance sheet and the net income as shown in the Profit and Loss account cannot be said to reflect the correct measurement of the financial position of an undertaking, as they do not have any relation to the market value of the assets or their replacement values. This idea that the transactions should be recorded at cost rather than at a subjective or arbitrary value is known as Cost Concept. With the passage of time, the market value of fixed assets like land and buildings vary greatly from their cost.

These changes or variations in the value are generally ignored by the accountants and they continue to value them in the balance sheet at historical cost. The principle of valuing the fixed assets at their cost and not at market value is the underlying principle in cost concept. According to them, the current values alone will fairly represent the cost to the entity. The cost principle is based on the principle of objectivity. The supporters of this method argue so long as the users of the financial statements have confidence in the statements, there is no necessity to change this method.

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Accounting Equation Dual concept may be stated as "for every debit, there is a credit." Every transaction should have two sided effect to the extent of same amount. This concept has resulted in Accounting Equation which states that at any point of time the assets of any entity must be equal (in monetary terms) to the total of owner's equity and outsider's liabilities. This may be expressed in the form of equation: A-L = P where A stands for assets of the entity; L stands for liabilities (outsider's claims) of the entity; and P stands for Proprietor's claim (Capital) on the entity. (The form of presentation of equation A-L = P is consistent with the legal interpretation of financial position. Thus it emphasizes that properly speaking the proprietary claim is the balance after providing for outsider's claims against the business from the total assets of the business).

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