Q.Explain the Business Entity Concept and state why capital is shown as a liability in the Balance Sheet.

"Only monetary transactions are recorded" is the money measurement concept: accounting captures only facts expressible in money, giving all items a common, comparable unit.

Money measurement concept. Under this concept, only those transactions and events that can be measured and expressed in terms of money are recorded in the books of account. Money is used as the common measuring unit because it allows different items (cash, goods, machinery, wages) to be added and compared meaningfully.

Implications:

• Facts that cannot be expressed in money — such as the honesty of employees, efficiency of management, or good customer relations — are not recorded, even though they may greatly affect the business.

• Because everything is stated in money, records of different periods and firms become comparable.

• A limitation is that the concept ignores changes in the value of money (inflation), so figures of different years are not strictly comparable in real terms.

The statement expresses the money measurement concept — accounting records only what can be measured in money, so useful non-monetary facts are left out.

Explanation of the statement: According to the money measurement concept, only those transactions and events which can be expressed in terms of money are recorded in the books of accounts. Money is used as the common unit of measurement so that different items (a building, cash, goods, machinery) can be added together and compared.

Implications:

• Every transaction recorded must have a money value; a transaction that cannot be measured in money is not entered.
• Because money is the common measuring unit, heterogeneous assets can be totalled — e.g. ₹1,00,000 cash + ₹40,000 stock + ₹10,000 furniture can be added to a meaningful total.

Limitations (why it matters): Many facts that strongly influence a business cannot be recorded because they have no money measure — the efficiency and loyalty of employees, the honesty of the management, good relations with customers, or the effect of a change in government policy. So the books show only part of the picture.

A further point is that money is assumed to have a stable value, though in reality its purchasing power changes over time.