Money Measurement Concept

The concept of money measurement states that only those transactions which can be expressed in terms of money such as purchase of goods or payment of expenses or receipt of income, etc. are to be recorded in the book of accounts. All other transactions which cannot be expressed in monetary terms, for example, the appointment of a manager, health of the owner of the company or strike in the company by workers are not recorded in the books of accounts.

Another important aspect of the concept of money measurement is that the records of the transactions are to be kept not in the physical units but in the monetary unit. For example, a company may have a factory on a piece of land measuring 5 acres, 10 machinery, 50 personal computers etc… Since these assets are expressed in different units, so cannot be added to give any meaningful information about the total worth of business. Hence for accounting purpose, these are to be shown in money terms and not in physical terms.

However money measurement assumption is not free from limitations. Due to inflation, the value of money does not remain the same over a period of time, Therefore, in the balance sheet, when we add different assets bought at different points of time we are in fact adding diverse values,. Since the inflation is not accounted for in the book of accounts, the accounting data does not reflect the true and fair value of the company.

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