Money Measurement Concept

A balance sheet is always prepared as of the close of business on the last day of business year. Sometimes it may be prepared every quarter, every month, or even more often. Hence the minimum number of balance sheet prepared each year is one.

In adding together objects, as different automobiles, cash, computer equipments, sheet sets, bed linens, dust ruffles, canopy tops, mattress pads, and other inventory items, supplies, etc., on a balance sheet, it is necessary to express them in homogeneous units.

For this reason, each item in the balance sheet is measured in terms of money. Facts that appear in an accounting report must be reduced to a monetary common denominator. The phrase “common denominator” suggests one possible reason. By reducing disparate facts to monetary terms, we can deal with them arithmetically.

In reading the balance sheet of a company, it is easy to determine facts that are expressed in monetary unit, such as the fact that a company has a lot of money or the company is heavily in debt by simply examining the cash balance and the liabilities which are expressed in money.

Whereas the facts that the health of the president of the company is failing and that a strike is beginning at the company or that a competitor company has placed a superior product on the market are facts hard to determine as they cannot be reduced in monetary terms.

Since accounting reports include only those events which can be reduced to monetary common denominator, accounting is necessarily an incomplete account of the status of a business and cannot always be expected to give the most important facts about a business.

All business transactions are measured and recorded using only one unit of measurement. In accounting, only data measurable in terms of money are recognized and recorded in the books. Since money is used as legal tender, it is therefore the most practical unit of measuring financial data.

The function of this concept is to make possible a more systematic accumulation and analysis of the reported data. It is easier to assign dollar values to those transactions that involve cash inflows or cash outflows. The common practice is that those transactions that cannot be assigned an objective and reliable monetary value, they are not taken up in the books and are excluded from the financial statements of the business.

It is also assumed under this concept that the values already recorded in the books are not usually revised to take into consideration the changes in price level; they are not materially affected by inflation. This is to prevent indiscriminate alterations of the dollar values reported in the financial statements.