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What is Money Measurement Concept in Accounting?
The Money Measurement Concept states that in accounting, only those transactions, and events are recorded in the books which can be measured in monetary terms. In other words, all those events and transactions which could not be quantified in monetary terms are not recorded in the financial statements of the company.
Examples of transactions that are not recorded in the financial statements are as follows –
- Unfavorable Government Policies
- Skills set of employees and workers
- The working atmosphere and office culture of the organization
- The efficiency of the administrative and backend processes within the company
- Quality of the products and services
- Satisfaction of stakeholders
- Safety Measure within the company to prevent any hazard
Although it is difficult to assess the impact of such events into numbers, they have an indirect impact on the financial performance of the business either by way of assets, liabilities, incomes or expenses. Following cases would help us to understand the events and their impact on the business.
Practical Example of Money Measurement Concept in Accounting
The story of “Maggi”: Immeasurable Nestle India Controversy
The enduring success of any company can be effectually measured in terms of brand value it creates in the market
place, but more than that it is the brand image in the consumer’s eyes which matters the most. The USP of a particular product has to be the impact of it on environmental, social and human health criteria. In 2014, when a laboratory in Gorakhpur proved that the samples of Maggi contained lead and monosodium glutamate-1 (MSG) much beyond the permissible limit.
Despite the fact that Nestle India challenged this decision but the results by Kolkata Central Laboratory in 2015 corroborated the previous results. Consequently, several state governments began testing samples and banned the product. Within a few days, Maggi was off the shelves from every grocery store and kirana shops in the country.
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Though Maggi has returned this incident will always be referred and remembered as a black spot to the repute of
Nestle India. Despite the event being inevitable, the money measurement concept doesn’t account for it in the books
of accounts. Though, it has been shown in the books of accounts indirectly wherein the top line has been affected by
Apart from that, Nestle had to spend a huge chunk of money to control the damages happened to its brand image and also to get back its customer base. This resulted in a lot of brand building exercises like dedicated social media handles, customer service helplines and other PR activities resulting into increase in expenses and reducing the bottom line of the company.
Market Sentiments and Stock Prices
Although it must seem a little off the track to our topic but keeping the fundamentals and numbers of the company
remain unchanged, the market sentiment of a particular stock has the ability to influence the movement of its stock price.
The sentiments are based on the disruptions in the market climate i.e. Political, Economic, Social, Technological,
Environmental or Legal (PESTEL) factors related to a particular company, sector or an industry which can move the
prices either upwards or downwards depending on the outlook. Unlike inputs such as sales, depreciation, taxation etc. the events which affect the stock prices aren’t recorded in the financials of the company, but they invariably affect the business. This reflects the downside of the principal, as these intangibles invariably have the ability to influence the price and the business but still, these are not being taken into the books of accounts actively.
Important Factors Related to Money Measurement Concept
Keeping the above principle in mind, there are other important factors which should be kept in mind while analyzing
the financials of the company regardless the fact, whether it could be accounted for or not: –
- Who are the promoters of the company and what are their backgrounds?
This is important as the balance sheet doesn’t talk about the people behind the business. Their sanity check is relevant to understand if they have any political affiliations or criminal backgrounds, as these factors do hold weight more than the numbers.
- Who are the major shareholders in the company?
It is also advisable to understand who owns the shares of the company and its background. It could give us a
positive outlook if the shareholder’s names are renowned.
- Who are the business competitors?
It helps to know the competition in the market, as it makes us aware of the profit margins. Along with that, the structure within which the business operates, whether it is monopoly, duopoly or monopolistic market
- Does the industry have any restriction or barrier for new participants?
Understanding the barriers helps us to know the long-term growth potential available in the market.
- Is the company planning to expand the business or its scope of business?
It will let us know about the Research & Development wing operating in the business. It will also make us aware, how
innovation-driven the business is.
- How many factories and plants does the company have and in which all locations are they located?
It will let us know the geographical presence of the company apart from that at times, the factories may be
located at a prime location which could go off the balance sheet making the company undervalued.
- Working atmosphere or culture of the company
If the working atmosphere or culture of the company is not favorable in the organization, in that scenario, the employee retention would be low, which would result in
the additional cost burden for the company to attract and train new employees.
The major problem in the money measurement concept is that many factors can lead to long-term changes in the financial results or financial position of a business, but the concept does not allow them to be accounted for in the financial statements. The only exception would be a discussion of relevant items that management includes in the disclosures that accompany the financial statements. Therefore, it is possible that some key underlying advantages of a business are not disclosed, which tends to under-represent the long-term ability of a business to generate profits. The other way round is typically not the case since management is encouraged by the accounting standards to disclose all current or potential liabilities of a business in the notes accompanying the financial statements.
In short, the money measurement concept can lead to the issuance of financial statements that may not adequately
represent the future upside of a business or uncertainties. However, if the money measurement concept were not in place, managers could deliberately add intangible assets to the financial statements that have little or no supportable basis at all.
This has been a guide to what is Money Measurement Concept in Accounting and its definition. Here we learn terms related to Money Measurement Concept along with practical examples. You may learn more about accounting from the following articles –