Money measurement concept definition
/What is the Money Measurement Concept?
The money measurement concept states that a business should only record an accounting transaction if it can be expressed in terms of money. This means that the focus of accounting transactions is on quantitative information, rather than on qualitative information. Thus, a large number of items are never reflected in a company's accounting records, which means that they never appear in its financial statements. Examples of items that cannot be recorded as accounting transactions because they cannot be expressed in terms of money include:
Employee skill level
Employee working conditions
Expected resale value of a patent
Value of an in-house brand
Product durability
The quality of customer support or field service
The efficiency of administrative processes
All of the preceding factors are indirectly reflected in the financial results of a business, because they have an impact on either revenues, expenses, assets, or liabilities. For example, a high level of customer support will likely lead to increased customer retention and a higher propensity to buy from the company again, which therefore impacts revenues. Or, if employee working conditions are poor, this leads to greater employee turnover, which increases labor-related expenses.
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Examples of the Money Measurement Concept
Here are several examples of the money measurement concept:
Purchase of equipment. A manufacturing company buys a new machine for $50,000. According to the money measurement concept, this transaction is recorded in the company’s accounting books because it has a measurable monetary value. However, the increased production capacity or employee efficiency resulting from this machine is not recorded unless it can be quantified in monetary terms, as only the financial cost of the machine is recognized.
Employee skills and morale. A software company invests heavily in employee training to enhance skills and improve morale. While these factors can significantly impact productivity and profits, they cannot be recorded directly in financial statements because their value cannot be precisely quantified in dollars. Only the actual expenses of the training program, such as course fees and materials, are recorded as they have a clear monetary value.
Customer satisfaction. A retail business conducts a survey showing high customer satisfaction, which is likely to drive future sales. Although this is valuable information, the money measurement concept excludes it from the accounting records because satisfaction itself cannot be directly measured in monetary terms. Instead, only tangible outcomes, such as an increase in sales revenue, would be recorded once they occur and can be quantified.
These examples illustrate how the money measurement concept ensures that only transactions with a definite monetary value are recorded in financial statements, maintaining clarity and objectivity in accounting.
Problems with the Money Measurement Concept
The key flaw in the money measurement concept is that many factors can lead to long-term changes in the financial results or financial position of a business (as just noted), but the concept does not allow them to be stated in the financial statements. The only exception would be a discussion of pertinent items that management includes in the disclosures that accompany the financial statements. Thus, it is entirely possible that the key underlying advantages of a business are not disclosed, which tends to under-represent the long-term ability of a business to generate profits. The reverse is typically not the case, since management is encouraged by the accounting standards to disclose all current or potential liabilities in the notes accompanying the financial statements. In short, the money measurement concept can lead to the issuance of financial statements that may not adequately represent the future upside of a business. However, if this concept were not in place, managers could flagrantly add intangible assets to the financial statements that have little supportable basis.