Transactions are the main events in accounting that require recording in the books of accounts before they are used to prepare financial statements in a reporting period. Accountants have agreed that these transactions should be measured in money terms. As a result the money measurement concept was formed. In this article, we explained this concept in detail.
1. What's money measurement concept
Money measurement or measurability concept is an accounting concept that states that the basis for measuring financial transactions is its money value. Accountants know that money is the measurement basis when recording transactions and preparing financial statements. Any other methods, such as, kilometers or other kind of measuring quantitatively is not monetary value.Â
In the preparation of financial reports, entities usually use local or international GAAP. Most local standards require the use of historical cost as the measurement basis. However, the International Financial Reporting Standard board, IASB, is pushing for the use of fair value. For example, they encourage the use of fair value in computing for the value of property, plants, and equipment (PPE). Although, the use of past cost is not out of place if it is more relevant and presents the information more fairly.
2. Types of money measurement basis
There are mainly three money measurement bases in accounting. The first two explained below are used when a business is a going concern. The third is applicable for businesses that plan to liquidate as at when the financial statements are prepared.
2.1 Historical cost
The value of an item as at the time it was incurred is referred to as the historical cost. PPE and expenses are generally measured at historical cost. It is also referred to as past cost.
2.2 Fair value
It is the market price for an item. Also referred to as the current price of the item. The fair value can be measured by a professional or via open market sources. Inventory is usually measured at the lower of cost or fair value.
2.3 Breakup value
This method of money measurement applies to entities that intend to liquidate or do not have any other choice than to do so. When a business liquidates, the monetary value of their assets and liabilities are measured at their break up, that is the value at which they are recoverable.
3. Importance of measurability concept
3.1 Financial statement presentation
Money measurement concept provides the means of measuring financial statements. As a result financial statements can be prepared and presented in money terms and local currencies.
3.2 CompatibilityÂ
With money value, financial statements can be compared by an entity with other entities in the same industry. Also helps investors to value a company based on several valuation bases.
3.3 Decision making
With it, management and other users of financial statements can make decisions by relying on the measurement placed on those reports.
4. Conclusion
In final words, the measurability concept is the use of money as a measure for transactions and in preparing financial statements. In using this principle, accountants rely on international or local GAAP and prepare reports in line with those standards.
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