Cambridge IGCSE Accounting(0452)/O Level Principles of Accounts(7110) Notes:Money measurement concept and Historical cost concept

  • At the heart of the accounting discipline are two important concepts:
  • The Money measurement concept and
  • The Historical cost concept

The Money measurement concept

  • It is also known as the measurability concept
  • The concept dictates that only transactions and events that are capable of being measured in monetary terms are
  • recognized in the books and consequently the financial statements
  • What this means is that all transactions recorded in the books must be capable of being measured and expressed in quantitative monetary terms
  • Usually the concerned business has to choose an operating currency
  • All transactions in the books have to be expressed in terms of that currency
  • A transaction is only recorded if it can be reliably and accurately measured in monetary terms
  • Material items of a non monetary nature such as changes in regulations must be disclosed in the form of notes separate from the financial statements
  • You cannot for example record employee skills,morale or the quality of goods in the books

Historical cost concept

  • Historical costs is the actual cost incurred or expended by the business in acquiring an asset in the past
  • This dictates that assets must be recorded at their historical cost
  • These concept is superseded by other rules however
  • For example in times of hyperinflation such as those experienced by Zimbabwe and other countries in the past
  • Accounting figures have to be adjusted for inflation in order to make comparisons easier
  • Also it is possible for the value of assets to be revised under the revaluation concept

To access more topics go to the Cambridge IGCSE Accounting(0452)/O Level Principles of Accounts(7110) Notes.