Money Measurement Concept | Meaning, Significance and Limitations

What is Money Measurement Concept?

Money measurement concept can be defined as the concept under which the business needs to record only those transactions that can be expressed in terms of money. Money measurement concept undertakes only quantitative transactions and not qualitative ones. Qualitative transactions never get recorded in the books of accounts and thus never get reflected in financial statements. Quantitative transactions can be said to have a direct effect on the business whereas qualitative transactions have an indirect effect on the business.

Geeky Takeaways:

• Money measurement concept creates a single dominator for the purpose of measurement of performance, namely money.
• This concept records only monetary transactions i.e. transactions that can be expressed in terms of money like, cash sales, cash purchases, assets sold for cash or on credit, salaries, rent, shares, etc.
• This concept does not record those transactions that can not be expressed in terms of money like employee skill level, product durability, the efficiency of administrative processes, etc.

Components of Money Measurement Concept

Money measurement concept records only quantitative terms and not qualitative ones. Money measurement concept tells businesses to cover only those transactions that can be expressed in terms of money (quantitative transactions) like, cash sales, cash purchases, assets sold for cash or on credit, salaries, rent, shares, etc. Transactions that can not be expressed in terms of money (qualitative transactions) like employee skill level, product durability, the efficiency of administrative processes, etc. never get recorded in the financial system and thus in financial statements.

Example of Money Measurement Concept

As money measurement concept records only quantitative transactions that affect business directly and ignores transactions that affect business indirectly. Laboratories, in 2014, proved the high lead content in Maggi which turned out to be harmful for human consumption. The downfall of Maggi caused goodwill and financial loss for the brand, but only financial loss was recorded in the books due to the money measurement concept. The controversy left a black dot on the goodwill of Nestle India, but this whole thing did not get recorded in the books of accounts because it can not be expressed in terms of money due to the money measurement concept. The comeback of Maggi included strengthened customer service helplines, more engaging social media handles, and other PR activities, resulting in increased expenses from Maggi’s end. The increased expenses get a place in the books of accounts, but the efforts made to increase the sales get left out.

Significance of Money Measurement Concept

1. Objectivity: Monetary values are objective and easily understandable, making financial information more reliable and comparable across different entities.

2. Quantifiable Comparisons: Monetary measurement allows for easy comparison of different assets, liabilities, and transactions. This helps stakeholders in making more informed decisions.

3. Consistency: Monetary measurement ensures uniformity in recording and reporting financial data, enhancing the consistency of financial statements.

4. Auditing and Verification: The concept of money measurement facilitates auditing and verification processes, as financial records can easily cross-checked and validated.

Limitations of Money Measurement Concept

1. Exclusion of Non-Monetary Factors: The concept of money measurement ignores non-monetary factors such as employee satisfaction, brand value, and environmental impact, which can be crucial indicators of a company’s health.

2. Subjectivity: Assigning monetary values to certain items, like goodwill or intellectual property, can involve subjective judgements, potentially leading to inconsistency.

3. Ignores Qualitative Aspects: The concept overlooks qualitative aspects that could impact an organisation’s long-term success, such as innovation, employee skills, and customer loyalty.