In business, all transactions are represented in monetary unit. For accounting, money is accepted as common measurement unit. According to this concept, only those events or transactions, which can be measured in terms of money, are recorded in the books of accounts. The transactions which cannot be measured in terms of money are not recorded in accounts.
Examples :
- Instead of recording physical quantity of assets purchased, like chairs, tables, etc. the purchase will be recorded at monetary value of such assets.
- Instead of recording physical quantity of goods sold, the sales will be recorded at monetary value of such goods.
- When wages, salary, etc. are paid based on number of hours or days worked to different workers, the transaction will be recorded in books of accounts based on the monetary amount involved.
- No accounting entry is recorded for strike by factory workers even if it is an important event affecting business.
- No accounting entry is recorded in books of account for resignation of a competent and efficient production manager that may adversely affect the production.
- No accounting entry is made in the books of accounts for advantage of having a team of sincere, honest, hard-working and efficient employees with the firm.
- No accounting entry is recorded for death of a key employee of the firm even if it is an important event affecting business.
- Balance Sheet is not a Valuation Statement.
- Excellent quality of management is not directly shown in the Balance Sheet.
