What is Money Measurement Concept in Accounting?
Money Measurement Concept is one of the concepts of the accounting according to which company should record only those events or transaction in its financial statement which can be measured in the terms of money and where assigning of the monetary value to the transactions is not possible then it will not be recorded in the financial statement.
In simple words, it means that 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.Financial Statements Of The Company.Financial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.
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 effect on the financial performance of the business either by way of assets, liabilities, incomes, or expenses. The 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 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.
Although Nestle India challenged this decision, 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.
Though Maggi has returned, this incident will always be referred to and remembered as a black spot to the reputation of Nestle India. Despite the event being inevitable, the money measurement concept doesn’t account for it in the books of accounts. Though it is shown in the books of accounts indirectly, the top lineTop LineThe top line is the revenue earned by the business by selling goods or services, reported in the income statement for a defined period. has been affected by this event.
Apart from that, Nestle had to spend a considerable chunk of money to control the damages that happened to its brand image and also to get back its customer base. This happening resulted in a lot of brand building exercises like dedicated social media handles, customer service helplines, and other PR activities resulting in an increase in expenses and reducing the bottom line of the companyBottom Line Of The CompanyThe bottom line refers to the net earnings or profit a company generates from its business operations in a particular accounting period that appears at the end of the income statement. A company adopts strategies to reduce costs or raise income to improve its bottom line. .
Market Sentiments and Stock Prices
It must seem a little off-topic, but keeping the fundamentals and numbers of the company remains unchanged, the market sentiment of a particular stock can influence the movement of its stock price.
The sentiments base 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 industry can move the
prices either upwards or downwards depending on the outlook. Unlike inputs such as sales, depreciationDepreciationDepreciation is a systematic allocation method used to account for the costs of any physical or tangible asset throughout its useful life. Its value indicates how much of an asset’s worth has been utilized. Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year. , taxation, etc. the events which affect the stock prices aren’t recorded in the financials of the company, but they invariably affect the business. It reflects the downside of the principal, as these intangibles invariably can influence the price and the business. However, still, these are not being taken into the books of accounts actively.
Keeping the above principle in mind, there are other important factors that should be kept in mind while analyzing
the financials of the company regardless of the fact, whether it could be accounted for or not: –
- Who are the promoters of the company, and what are their backgrounds?
This data is vital 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 majority 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 marginsProfit MarginsProfit Margin is a metric that the management, financial analysts, & investors use to measure the profitability of a business relative to its sales. It is determined as the ratio of Generated Profit Amount to the Generated Revenue Amount. . Along with that, the structure within which the business operates, whether it is a monopoly, duopolyDuopolyWhen there are two market leaders in any industry or service, this is referred to as a duopoly. Such companies have complete control of the market, earning high profits and gains in a specific sector or service. In the credit card industry, for example, Visa and MasterCard have a duopoly., or monopolistic market.
- Does the industry have any restrictions or barriers 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 unfavorable, 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. Still, 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 vital 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 this concept were not in place, managers could deliberately add intangible assetsIntangible AssetsIntangible Assets are the identifiable assets which do not have a physical existence, i.e., you can't touch them, like goodwill, patents, copyrights, & franchise etc. They are considered as long-term or long-living assets as the Company utilizes them for over a year. to the financial statements that have little or no supportable basis at all.
This article has been a guide to what is Money Measurement Concept in Accounting and its definition. Here we learn terms related to this Concept along with practical examples. You may learn more about accounting from the following articles –