Money measurement concept implies that only those events and transactions are recorded in the financial statements that can be measured in terms of money. As the term financial statement or financial information itself emphasize that subject matter is financial in nature i.e. money related. Having transactions translated in currency, it is one of most of the best form to communicate economic activity.
In other words, transactions and events must be measurable in the form of monetary unit for better understanding and communication to the users of financial statements. Having transactions translated or given a “value” in money, it is easier for the users in conducting analysis, comparisons and economic decisions. For the same reason it is also called monetary unit assumption.
In simple words, entity must not only be able to quantify the events and transactions but also have the framework to monetize the transactions in local currency (or any other selected currency) in order to recognize them in the financial statements. Any event or transaction that cannot be monetized cannot be recorded.
Therefore, any qualitative information like motivation of staff, hardwork of management, skill of labour, loyalty of customers cannot be recorded as assets or otherwise in the financial statements.
Money measurement concept is closely related with other accounting concepts including stable measuring unit concept and historical cost accounting approach. To some money measurement concept is part of stable monetary unit concept which is an essential assumption to prepare financial statements. For the sake of better understanding two concepts are defined and detailed separately this course.
Although it differs from one accounting framework to other, money measurement concept is considered one of the four essential accounting assumptions including; economic entity, going concern, accruals and time period.
ABC Plc. has recognized an asset worth 500,000 naming it after a brand it recently launched. Brand is a hit and customers are pouring in large numbers. Concluding on these basis, ABC is of the opinion that brand itself has a recognition in the market and must be recognized in the books and will be amortized over 5 years period.
Management has reached the figure of 500,000 considering 200,000 as development cost and 300,000 for brand-tag-premium as management finds the tag alone attracts customers.
ABC Plc. can recognize 200,000 in the books if and only if such costs qualify the underlined conditions for cost capitalization otherwise will be treated as periodic expense in the period incurred. 300,000 cannot be capitalized as entity has no reasonable way of measuring the value of brand unless it is sold.