Accountancy · Ch 2 — Theory Base of Accounting
Money Measurement Concept
Money Measurement Concept
The Core Idea
The money measurement concept is the accounting rule that says: only those transactions and events that can be expressed in terms of money are recorded in the books of accounts. If it cannot be assigned a rupee value, it stays out of the accounting records — no matter how important it is to the business.
This is the first filter that decides what enters the accounting system and what does not.
What Gets Recorded — and What Does Not
Transactions that have a clear monetary value are recorded. Sale of goods, payment of salaries, receipt of rent, purchase of machinery — all these involve an exchange of money or a monetary obligation, so they appear in the books.
But many significant happenings in an organisation cannot be expressed in money terms. The appointment of a new manager, the skills and capabilities of the employees, the creativity of the research department, the reputation or goodwill of the firm among the public — none of these have a direct rupee measure. Therefore, they find no place in the accounting records, even though they may be vital to the business's success.
A common misunderstanding: "Goodwill" does appear in the books, but only when it has been purchased (i.e., a price has been paid for it). Internally generated goodwill or reputation is not recorded because no monetary transaction has occurred.
The Unit of Measurement: Money, Not Physical Units
A second important aspect of this concept is that transactions are recorded in monetary units, not in physical units. Consider a business that owns the following assets on a particular day:
- A factory on 2 acres of land
- An office building with 10 rooms
- 30 personal computers
- 30 office chairs and tables
- A bank balance of ₹5 lakh
- Raw material weighing 20 tonnes
- 100 cartons of finished goods
These assets are expressed in completely different units — acres, rooms, numbers, tonnes, cartons. You cannot add 2 acres to 30 computers to 20 tonnes and get any meaningful total. The only way to combine them is to convert everything into a common measure: money.
So for accounting purposes, each asset is recorded at its cost in rupees and paise:
| Asset | Amount (₹) |
|---|---|
| Factory land | 2,00,00,000 |
| Office building | 1,00,00,000 |
| Computers | 15,00,000 |
| Office chairs and tables | 2,00,000 |
| Raw material | 33,00,000 |
| Finished goods | 4,00,000 |
| Total assets | 3,59,00,000 |
Now the total assets of the enterprise can be stated as ₹3 crore 59 lakh — a single, meaningful figure.
A Major Limitation: Changing Value of Money
The money measurement assumption is not without its problems. The value of money does not remain stable over time. Due to inflation (a rise in prices), the purchasing power of a rupee today is much less than what it was ten years ago. …