May 28, 2022

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ACCOUNTING CONCEPT: MONETARY MEASUREMENT

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ACCOUNTING CONCEPT: MONETARY MEASUREMENT



Monetary measurement is an accounting concept which states that accounting records in the source documents, subsidiary books, ledgers and financial statements must be measured in term of money.

This follows a characteristic of money which is unit of account. Money serves as a unit of account. Money is the only measure business transactions can be recorded in the books of accounts. This concept also relates with the historical cost concept. This is so as the word “cost” has to be money.

In preparing financial statement, the currency of the country the business operates in, is used as the measurement basis. If the business is a branch or a subsidiary of another entity abroad, the business’ financial statement will be translated to it’s head office or parent entity account.

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WEAKNESSES OF MONEY MEASUREMENT CONCEPT

The money measurement concepts has several pitfalls.

1. It does not indicates the value of each employees of the business. The skills of each employees which make the business to make huge profit is not included when measuring business transactions in the accounting records of the business.

2. The number of customers loyal to the business product brand are not shown. The number of customers of a business is directly related to the revenue of the business. But this is not stated in the accounting records.

3. Effective Marketing of staff: The efforts put in by staff to ensure the business name and product are well known and sold are not reflected in the accounting records. For example, in their non working periods, the efforts of employees to make known the entity they work for is not recorded in the accounting books.

4. Inflation and deflation in the country where the business operates may affect the real money value of a transaction or class of account when the financial statement is prepared.

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5. It is difficult to compare financial statements of a business that is located in two countries with different currencies unless, the currencies are translated to a standard currency, say Dollar.

BENEFITS OF USING MONEY MEASUREMENT CONCEPT

1. Money measurement concept aids comparison of financial statements.

2. Money measurement concept aids the business owner(s) to know the profit or loss of the entity.

3. Money is what is paid out as dividend to shareholders. Using this concept motivates shareholders to continue investing their money in the company.

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