Money Measurement Concept, Cost Concept & Dual Aspect Concept

 

Money Measurement Concept:

Does a business value everything it has in the accounts? Hopefully, you will have a greater understanding after reading this lecture.

I’m Aqeel Ahmed and Welcome to The Accounting Inn, where we create a blog for accounting students so that they can learn about accounting.

 You should first know that there is a group of rules of accounting. They are well known and referred to by many as accounting concepts. These concepts and rules are essential when preparing the final accounts of an entity. Even to some extent the accounting concepts also assist to make the final accounts relevant and trustworthy to its users. In all, there are ten main accounting concepts, of which we will look at the money measurement concept. The money measurement concept illustrates that all items should be expressed in monetary terms.

 In some cases, where items cannot be given a monetary value will not be included in the final accounts. This still applies even if the items are responsible for a business's performance.

For example, strong management, market share of industry, and good customer relations cannot be included in the trading profit and loss account or balance sheet because they cannot be given an objective value.

 Let’s give an example to illustrate the concept.

 Yoyo Ltd is a well-established children’s toy retailer. Recently the business has restructured and appointed new management, due to this, the business has performed significantly above expectations. Therefore, some in the business want to record the new management in monetary terms because of their noteworthy influence on the business performance. How should the new management be recorded in the accounts?

 When applying for the money measurement concept, the new management should not be recorded in monetary terms in the accounts of the business even if the performance was improved.

 This is because the concept states that items such as good management and a skilled workforce cannot be included in the accounts as it cannot be given an objective value in monetary terms, even if they benefit the business. So that was the definition of the money measurement concept.

 The money measurement concept underlines the fact that in accounting and economics generally, every recorded event or transaction is measured in terms of money, the local currency monetary unit of measure.

Cost Concept:

At what cost do businesses record assets and liabilities in their accounts? Hopefully, you will know after reading this article.

I’m Aqeel Ahmed and Welcome to The Accounting Inn, where we create a blog post for accounting students so that they can learn about accounting.

 To begin with, there are a set of concepts or rules of accounting. They are referred to, by many, as accounting concepts. These concepts and rules are fundamental in preparing the final accounts of an entity. And it can be said that to an extent the accounting concepts help to make the final accounts relevant and reliable to its users.

Overall, there are ten accounting concepts, of which the one that we will look at in this article is the cost concept.

 The cost concept expresses that assets and liabilities are initially recorded in the final accounts at the “at cost price”. In other terms, it is the actual amount paid when the asset or liability was originally acquired by a business. This approach of recording the assets and liabilities is regarded as the most objective way of valuing these items in the accounts. This is because those who are valuing or recording the assets or liabilities in the accounts are not dependent on trying to estimate what the value of the asset or liability might be if it were to be sold.

 Let’s give an example to illustrate the concept.

James has been a farmer for more than 10 years. When he started farming, he bought a custom-made tractor for Rs.40,000 which can plough and plant more crops in less time than any other tractors available. James has been thinking of selling the custom-made tractor to fund an up-to-date one. He has done some research and found that his old custom-made tractor has an expected market value today of Rs.70,000. James is now thinking of recording the tractor cost price in the balance sheet at Rs.70,000 because the value of assets will be higher. What should he do?

When following the cost concept James should not record the tractor at Rs.70,000 because the concept expresses that assets and liabilities are initially recorded in the final accounts at the “at cost price”. Therefore, James should keep the cost value of the tractor at Rs.40,000 in the balance sheet and not Rs.70,000 because the Rs.40,000 is the actual amount paid when the tractor was originally purchased. Additionally, if James was to record the tractor cost at Rs.70,000 this would overstate the assets and balance sheet values and this would not follow the prudence concept.

So that is the definition of the cost concept.

The cost principle is part of the generally accepted accounting principles in accounting. Assets should always be recorded at their cost when the asset was new, and also for the life of the asset.

Dual Aspect Concept:

How many times in the accounts should a business transaction be recorded? Hopefully, the dual aspect concept will give you a better understanding!

I’m Aqeel Ahmed and Welcome to The Accounting Inn, where we create a blog post for accounting students so that they can learn about accounting.

Today I’m going to discuss that, what is the dual aspect concept?

To start with, there are a few concepts or rules of accounting. They are well known and referred to by many as accounting concepts. These concepts and rules are fundamental in preparing the final accounts of an entity. Also, to an extent, the concepts assist in making the final accounts relevant and trustworthy to its users.

The dual aspect concept states that each business transaction is recorded by means of two opposing accounting entries. In other words, there are two aspects of accounting for a transaction of a business. One can be represented by the assets of the business and the other by the claims against them. It is very important to note that the two opposing entries or aspects are of equal value i.e., the same amount.

 The dual aspect concept is compared as an alternative form of the accounting equation of Assets = Capital + Liabilities. Whereby if one side of the equation is affected by an amount then the opposite is also affected by the same amount. The double-entry of the bookkeeping system is a great example of the dual aspect concept in practice.

It shows that for every transaction, two things are affected in other terms there will be a debit and credit entry.

Let’s now have a look at an example to demonstrate the concept.

 Carl has recently started his own cleaning business. He decided to buy a new van for the business to transport his cleaning equipment and to get from customer to customer. Carl bought the van for Rs.40,000 and paid by cheque. Will Carl need to apply the dual aspect concept and how will this record in the accounts?

Carl will apply the dual aspect concept because the purchase of the van can be identified as a business transaction.

And the dual aspect concept states that each business transaction is recorded by means of two opposing accounting entries i.e., a debit and credit entry. Therefore, the purchase of the van of Rs.40,000 will cause an increase or debit entry of Rs.40,000 in the value of motor vehicles in the fixed assets and the opposing entry will cause there to be a decrease or credit entry of Rs.40,000 in the value of bank in the current assets.

So that is the definition of the dual aspect concept

Every transaction of a firm is recorded in two different accounts. Every transaction has a dual impact on the accounting records. Accounting systems are set up to record both of these aspects of a transaction; this is why accounting is called a double-entry system.