Accounting Concepts- Money Measurement

Accounting Concepts are conventions that all accountants use in order to create records which provide a true and fair view of the business.

One of these conventions is the money measurement concept.

This states that only items that can be objectively stated in monetary terms can be included in the accounting records. This seems pretty straight forward right? It is.

So what are examples of things that you cannot put in the accounting records?

1. loyalty of your customers, sure your customers may be your greatest asset, but it does not mean that you can objectively and verifiably put a monetary figure on their worth.
   
2. staff morale, staff with good morale is another asset to your business, they are likely to work harder and become more productive, unfortunately this is another thing you cannot objectively state.

A confusing one sometimes is goodwill. The value of a business over and above its net assets. For example if a business' net assets (i.e. assets less liabilities) is $1million but the business was sold for 1.5 million, then goodwill will be 0.5 million. This is an example of externally generated goodwill, and because it has been paid for then it is objective. However internally generated goodwill may not be put as an asset.

So you may think that most intangible assets are not included as they cannot be measured in terms of money? Wrong. Patents is an example of intellectual property, they protect an idea or discovery, these are usually bought in x amount of years and their cost (which has been paid for and can be verified) can be distributed over its useful life.

There you go, money measurement. More concepts coming up!