Page 29 - DCOM101_FINANCIAL_ACCOUNTING_I

Unit 3: Principles of Accounting

Money Measurement Concept Notes

This is the concept tunes the system of accounting as fruitful in recording the transactions and
events of the enterprise only in terms of money. The money is used as well as expressed as
a denominator of the business events and transactions. The transactions which are not in the
expression of monetary terms cannot be registered in the book of accounts as transactions.

Example:
1. 5 machines, 1 ton of raw material, 6 fork-lift trucks, 10 lorries and so on. The early mentioned
items are not expressed in terms of money instead they are illustrated only in numbers. The
worth of the items is getting differed from one to the other. To record the above enlisted
items in the book of accounts, all the assets should be converted into money.
2. 5 lathe machines worth ` 1,00,000; 1 ton of raw materials worth amounted ` 15,00,000 and
so on.

The transactions which are not in financial in character cannot be entered in the book of

accounts.
Recording of transactions are only in terms of money in the process of accounting

Business Entity Concept

This concept treats the owner as totally a different entity from the business. To put in to nutshell

“Owner is different and Business is different”. The capital which is brought inside the firm by the
owner, at the commencement of the firm is known as capital. The amount of the capital, which

was initially invested, should be returned to the owner considered as due to the owner; who was
nothing but the contributory of the capital.

Example: Mr. Z has brought a capital of ` 1 lakh for the commencement of retailing business
of refrigerators. The brought capital of ` 1 lakh is utilized for the purchase of refrigerators from
the Godrej Ltd. He finally bought 10 different sized refrigerators. Out of 10 refrigerators, one was

taken away by himself as the owner.

Real Capital: Monetary Capital:
10 Refrigerators @ Rs.1 lakh Rs.1 lakh provided by Mr.Z

In the Angle of the Firm

The amount of the capital ` 1 lakh has to be returned to the owner Mr. Z, which considered being
as due. Among the 10 newly bought refrigerators for trading, one was taken away by the owner
for his personal usage. The one refrigerator drawn by the owner for his personal usage led the
firm to sell only 9 refrigerators. It means that ` 90,000 out of ` 1 Lakh is the volume of real capital

and the ` 10,000 worth of the refrigerator considered to be as drawings; which illustrates the
capital owed by the firm is only ` 90,000 not ` 1 lakh.

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