Money measurement concept

Definition

Money measurement concept (also known as monetary unit assumption) states that all accounting records should be made in terms of monetary units. All transactions are measured in monetary units and recorded in the books of accounts in terms of money which is generally the currency unit used in the country. In the United States, for example, all accounting records are maintained in terms of US-dollar. A multinational company, however, may maintain accounts in dual currencies.

Explanation

A famous saying is that “Money is that what Money does”. Money acts as a standard unit to measure the value of goods & services. Under Money Measurement Concept it is assumed that only those transactions which have a monetary value should be recorded in the books of accounts.

In other words, according to this concept, only those transactions are recorded in the books of accounts which can be measured in terms of money. There are some problems like variation in value of money, ignorance of qualitative factors like quality of management, growth of competition etc. In spite of these problems, Money Measurement Concept is acceptable due to its easy adaptability and understandability.

The money measurement concept is based on the assumption that all transactions can be measured in money terms. Now it is the standard practice that all documents on which accounting records are based are issued in terms of money; hence maintaining accounting records in terms of money does not offer any problem.

Another important aspect of the money measurement concept is an assumption about the stability of the value of the monetary unit. While in reality, inflation results in erosion of value of a monetary unit, accounting records are based on the assumption that a monetary unit has a stable value.

Example

For example, an asset purchased for $12,000 in year 2003 and another asset purchased for $12,000 in year 2016 would have the same cost and incur the same depreciation charge for accounting purpose.

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