What is money measurement assumption?

Learn about Money measurement with Amol Palekar!

Case breakdown: Movie Rang Birangi

The scene that you just saw shows a calculation mistake in the Yamiguchi company’s draft. Ms. Sood (Played by Deepti Naval) points out Profit & loss account is off by 1,00,000 i.e. it was written as 2,30,000 Yen while it should have been 3,30,000 Yen.

This blog, Learning Perspectives will explore the meaning of the money measurement concept.

What is Money Measurement Assumption?

Accountants do not record all the activities of the business. They record, only those facts, events, or transactions that are expressed in money or can be translated in terms of money.

Money means the currency of a country such as rupees in India, pound sterling in the UK, Yen in Japan, and so on. This has an advantage since money is a common measuring unit (i.e. money), it is not possible to record or compare dissimilar facts, events, and transactions about a business enterprise. Similar to the scene that we saw, all expenses are expressed in Yen even though they are working out of India, their accounts are being recorded in Yen.

In the absence of a common measuring unit i.e. money, it is not possible to record or compare transactions of the business organization.

A business organization may own 2,000 square meters of building space, 10 metric tonnes of raw material, 7 motor vehicles, 5 machines, and Rs. 10,00,000 cash. These items cannot be added together to determine assets. The same is true for services offered by employees, suppliers, transport companies, etc.

To resolve this issue, all items need to be recorded in 1 common metric i.e. money. Everybody understands money because it is universally available. All the financial statements such as income statements, balance sheets, and cash flow statements are all presented in terms of money.

Some of the limitations of these assumptions are:

Money doesn’t always remain stable such as kilometer or gallon which are fixed metrics in nature. These metrics do not change with the change in oil prices or inflation. But the value of the rupee will, i.e. purchasing power of the rupee will change due to inflation and market forces. However, accountants record all transactions on the basis of rupees exchanged.

Transactions that cannot be recorded in terms of money are ignored. For example, the sincerity and loyalty of employees cannot be recorded, and the quality of management or the satisfaction of customers are not recorded in books of accounts.

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