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.

What is Money Measurement Assumption?

Accountants do not record all the activities of 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 UK, Yen in Japan and so on. This has 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 meter of building space, 10 metric tonne 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 statement, balance sheet, cash flow statement are all presented in terms of money.

Some of the limitations of this assumptions are:

Money doesn’t always remain stable such as kilometer or gallon which are fixed metric in nature. These metrics do not change with the change in oil prices or inflation. But the value of rupee will, i.e. purchasing power of 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, sincerity and loyalty of employees cannot be recorded, quality of management or satisfaction of customers are not recorded in books of accounts.

Written by: Ms. Gitika Chandra

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