Principles of Accounting: 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• These concept is superseded by other rules however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 Principles of Accounts Notes.