Money measurement concept, Accounting Basics

In accounting, only those facts that can be expressed in terms of money are recorded. When money is accepted not merely as a medium of exchange but also as a measuring rod of value, this has a very significant advantage as many widely differ assets and equities can be expressed in terms of a common denominator. Without these adding heterogeneous factors as 5 buildings, 10 machines and six trucks will not have much meaning.

Whereas money is probably the only practical general denominator and a yardstick, we should realize that this concept imposes two sever limitations. In the initial place, there are some facts that, though vital to the business, cannot be recorded into the books of account as they cannot be expressed in money terms. For illustration, the state of health of the Managing Director of a company, has been the key contributor to the success of business and is not recorded in the books. Likewise, the fact that the Production Manager and the Chief Internal Auditor are not on speaking terms or such a strike is regarding to start because labour is dissatisfied along with the poor working conditions in the factory, or such a competitor has recently acquired over the best customer, or such this has developed a better product, and rapidly will not be recorded even if all these events are of huge concern to the business.

From this standpoint, it means that accounting does not provide a total account of the happenings in the business. You will appreciate for all these have a bearing in the future profitability of the company.

Second, the utilization of money implies that a rupee nowadays is of equivalent value to a rupee ten years back or ten years later. Conversely, we assume that there is a constant or stable value of the rupee. In the accounts, money is shown in terms of its value at the time an event is recorded. The following changes in the purchasing power of money do not influence this amount. You are, perhaps, aware that mainly economies nowadays are in inflationary conditions along with rising prices. The value of a rupee in the 80s has depreciated for an unbelievably low level in the 90s. Most accountants identify full well that the purchasing power of a rupee does change, although very few recognise this reality in accounting books and create an allowance for changing price level. It is so, despite the reality that the accounting profession has devoted considerable attention to this difficulty, and many suggestions have been made to account for the results of changes in the purchasing power of money. Actually, one of the major problems of accounting nowadays is to find means of resolving the measurement problem, i.e. how to extend the value and the coverage of meaningful information. This will be desirable to present, in a supplementary analysis, the result of price level changes in the reported income of the business and the financial position.

Posted Date: 4/3/2013 5:52:32 AM | Location : United States







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