The Money Measurement Assumptions

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The Money – Measurement Assumptions

[Monetary Unit Assumptions]

Accountants do not record all the activities of business or accounting or economic entities. They record, only those facts, events and transactions that are expressed in money or can be translated in terms of money. Money means the currency of country such as rupees in India, dollars in U.S.A., pounds sterling in U.K. and so on. This has advantages since money is a common measuring unit or common denominator which makes it possible to record and compare dissimilar fact, events and transactions about a business enterprise. In the absence of common measuring unit (i.e., money), it is not possible to add or subtract various business events. An important corollary to monetary units assumptions is added assumptions that unit of measurement remains sufficient stable overtime. The justification for this accounting principle is that financial statements – income statement and balance sheet – summarise the operating results of the financial year and the position of the business enterprise at the end of the year. To do this effectively, a common unit of measurement must be used and that common unit of measurement undisputedly is money. Everybody understands money because it is universally available. It is certainly relevant to financial transactions and it is easy to use. However the money – measurement concept suffers from the following limitations or drawbacks:

(i)    Money, as a unit of measurement is not stable, that is, it does not have constant value over time. The rupee is not constant like units of physical measures. In using the money as a measuring unit for recording transaction the accountants have continuously ignored the effect of inflation (a period of rising prices). Accountants record the rupee amount of transactions, using the number of rupees exchanged in the transactions; they do not consider the purchasing power of the rupee that is, the amount of goods or services that rupees would have purchased last year or that is may purchase next year. It may be added that inflation decreases the purchasing power of money unit and deflation (a period of falling prices) increases the purchasing power of the monetary unit.

(ii)    Transactions, events or facts that cannot be recorded in money terms are ignored. The money – measurement assumption has, therefore, frustrated the development of human resource accounting.

(iii)    Financial statements are prepared from the transactions entered in the books of account. The entries in the books are made from the facts of individual transaction. It means that those facts of the business which are not derived form or related to transactions are not recorded in the accounting system.

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