accounting Concepts

Accounting Concepts Definitions Part : 3 ( Money Measurement Concept ,Reliability Concept )

Money measurement concept and Reliability Concept

accounting Concepts

4. Money Measurement Concept

Accounting concept stands on 4 basic ones and money measurement concept is one of them. money measurement concept state-

Any transaction which can be measured in monetary value and are relevant to business transactions, will be recorded and anything otherwise will be left out of the records.”

Now, the words in the definition of money measurement concept are going to be defined to make you understand the meaning of the definition:

        Transaction:

Any exchange/sacrifice of resources, which has a monetary value, of the business to get any benefit or, relevant to business opportunity, is called a transaction.

Now, as transaction is defined it is evident that monetary evaluation is a must for any sacrifice to be a transaction.

Now, if an entity sacks one of their employees who they used to pay a salary of $10000, should the sack be a transaction?

The clear answer is NO. If the entity pays the employee some salary then the payment of salary will be a transaction otherwise it is nothing of any sort.

Keep in mind that, even if the transaction is with invisible money even then this will be recorded as transaction.


money measurement concept example:

  • Entity decides to set the asset at hand at a rate of 10% per annum for depreciation
  • A portion of 2.5% is deemed to be uncollectible from this year’s sales/debtors

In both the cases there is an amount behind these but, the resultant amount should be calculated. See, the calculated amount is derived and deducted from the real ones, moreover, the amount calculated is based on assumption not some real figures. But, learn from here that any assumption based calculation is allowed as long as that is within the premises of the accounting rules. If the valuation is done by a professional accountant and that is permitted, then there is no problem.

Note that, such a sacrifice gives you sacrificed amounts to the relevant accounts and though no monetary sacrifice is traced, transaction should be recorded.

Look, here the sacrifice has a monetary value so, is deemed as transaction. So,

“Whenever there is a monetary value for a sacrifice then and only then, even if the transaction can’t be physically traced, then the sacrifice will be recorded as transaction.”

Well, we discussed the money measurement concept with example in brief. Do you want to know more detail about money measurement concept ? Then please let us know ! We will be happy to assist you :)

 

5. THE RELIABILITY CONCEPT

Now we move on to another basic concept which is reliability concept. It states that- “If any source of information is true, specific, can be traced back to the root and well documented; then the source will be called reliable.”

Now some neophytes may have questions regarding the definitions of the words which can be different from the actual meaning. But, before moving on to that get your mind in shape that reliability concept is related to accounting documentation, not related to accounting procedures.

                TRUE

The source of information will be deemed true if:

  • The source has proper documentation
  • The source is traceable to the root
  • The source should be specific, like- if the information is about the revenues of the entity then the source should be revenue generating departments or, some other debtor from outside the company or, sale of goods

Any of these is fulfilled or, some of these or, all of these are fulfilled.

                    WELL DOCUMENTED

The source should have a document (Either paperwork or, electrical). The document gives the source fulfillment. Without the document it is almost impossible to trace the source or, to deem the information to be true.

 

So, if there is a document which is traceable to the root, and proved to be relevant to that department and true, then the source will be deemed as reliable.

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