money measurement

7.1 Accounting Principles – Money Measurement (and the other 10 Principles)

1. Quick Overview of the Cambridge IGCSE 0452 Syllabus

The IGCSE Accounting syllabus is organised into seven content blocks. The notes below give a concise revision of each block, with a focus on the ten fundamental accounting principles (including Money Measurement).

Block	Key Topics	What you must be able to do (AO1‑AO3)
1 Fundamentals of Accounting	Accounting equation, profit & loss, difference between bookkeeping & accounting	Define terms, explain the purpose of the equation, calculate profit.
2 Sources & Recording of Data	Business documents, double‑entry, journals, ledgers, cash book, prime‑entry books	Identify source documents, record a transaction in the correct journal, post to ledger.
3 Verification of Accounting Records	Trial balance, bank reconciliation, control accounts, error‑identification	Prepare a trial balance, explain why certain errors do/​do not affect it.
4 Accounting Procedures	Depreciation, accruals, prepaid expenses, doubtful debts, inventory valuation, closing entries	Calculate depreciation (straight‑line & reducing balance), adjust for accruals, prepare closing entries.
5 Preparation of Financial Statements	Income statement, statement of financial position, cash flow statement (where required), different business forms (sole trader, partnership, limited company, clubs, manufacturing, incomplete records)	Construct statements from an adjusted trial balance, adapt format for each business type.
6 Analysis & Interpretation	Profitability, liquidity, efficiency & solvency ratios; limitations of ratios; comparative analysis	Calculate ratios, interpret results, comment on strengths/weaknesses of the business.
7 Accounting Principles & Policies	Ten fundamental principles, policy objectives, impact of IAS/IFRS (basic awareness)	Define each principle, explain its purpose, discuss limitations, apply to exam scenarios.

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2. The Ten Fundamental Accounting Principles

Principle	One‑sentence definition (AO1)	Purpose (why it matters)	Typical exam focus (AO2/AO3)
Business Entity	Only the affairs of the business are recorded; the owner’s personal transactions are kept separate.	Ensures information is reliable and not distorted by personal items.	Identify breaches; decide whether an item belongs in the accounts.
Going‑Concern	Financial statements are prepared on the assumption that the business will continue to operate for the foreseeable future.	Allows assets to be recorded at cost rather than liquidation values.	Explain asset valuation assumptions; discuss impact if the assumption is doubtful.
Accrual (Matching) Principle	Revenue and the expenses that generate that revenue are recognised in the same accounting period.	Gives a true picture of profit for the period.	Allocate prepaid/ accrued items; match expenses to related revenues.
Dual‑Aspect (Duality) Principle	Every transaction affects at least two accounts – one debit and one credit – keeping the accounting equation in balance.	Maintains the integrity of the trial balance and the statement of financial position.	Provide correct debit‑credit entries for a given transaction.
Consistency Principle	The same accounting policies must be applied from one period to the next unless a change is justified.	Allows users to compare financial statements over time.	Explain why a change in policy must be disclosed and its effect on comparability.
Materiality Principle	Only items that could influence the decisions of a user of the accounts need to be recorded or disclosed.	Prevents clutter and focuses attention on important information.	Decide whether an item is material enough to be shown separately.
Prudence (Conservatism) Principle	Anticipate no profits, but anticipate all probable losses; assets are not overstated and liabilities are not understated.	Protects users from over‑optimistic information.	Explain adjustments for doubtful debts, lower of cost or NRV, provision for warranties.
Historical Cost (Cost) Principle	Assets and liabilities are recorded at the amount of cash (or cash equivalent) paid or received at the time of acquisition.	Provides an objective, verifiable measurement basis.	State the measurement basis for PP&E, inventory, and explain its limitations.
Realisation (Revenue‑Recognition) Principle	Revenue is recorded when it is earned – i.e. when goods are delivered or services performed – regardless of when cash is received.	Matches income with the period in which the earning activity occurs.	Identify the point at which revenue should be recognised for sales, services, or long‑term contracts.
Money Measurement Principle	Only transactions that can be expressed in monetary terms are recorded in the accounting records.	Provides a common unit of measurement, enabling aggregation and comparison.	Identify non‑monetary items, explain why they belong only in the notes.

2.1 Money Measurement Principle – In‑Depth

Definition

Only those transactions and events that can be expressed in monetary terms are recorded in the accounting records. All amounts are measured in the functional (usually local) currency of the business.

Why it is required

• Creates a single, comparable unit of measurement.
• Allows aggregation of diverse items (e.g., cash, inventory, equipment) in the financial statements.
• Facilitates objective recording and reduces subjectivity.

Monetary vs. Non‑Monetary Items

Monetary items (recorded)	Non‑monetary items (not recorded in the statements)
Cash and cash equivalents Trade receivables Inventory (at cost) Property, plant & equipment (historical cost) Capital and revenue expenses (cost incurred) Liabilities (amount payable)	Employee skill levels Customer satisfaction Brand reputation Quality of management Future market potential (unless expressed as a monetary estimate)

Measurement Basis – Historical Cost

Under the Money Measurement Principle the default basis is historical cost. The amount recorded is the cash (or cash equivalent) paid at the time of acquisition.

Example: A machine bought for $15 000 is recorded at $15 000 even if its market value later falls to $12 000 or rises to $18 000.

Key Points to Remember

1. All entries must be expressed in monetary terms.
2. The functional currency is used throughout the accounting period.
3. Historical cost is the default measurement basis because it is reliable and objective.
4. Qualitative information may be disclosed in the notes, but never in the main statements.

Limitations & Links to Other Principles

• Ignores qualitative factors – users may need to apply prudence and make judgments.
• Historical cost can become outdated – ties to the going‑concern and realisation principles; re‑valuation may be required for decision‑making.
• Inflation erodes real values – a reminder of the prudence principle; disclosures about inflation effects are often required.

Typical Exam Command‑Word Application

• Define – “Define the Money Measurement principle.”
• Explain – “Explain why historical cost is used under this principle.”
• Identify – “Identify which of the following items would not be recorded in the accounts.”
• Discuss – “Discuss two limitations of the Money Measurement principle and their impact on users of accounts.”

Practice Question

Identify the accounting principle that is being breached if a company records the personal expenses of its owner as a business expense.

Answer: Business Entity principle – personal transactions must be kept separate from business records.

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3. The Remaining Syllabus Blocks – Concise Revision

3.1 Fundamentals of Accounting (Block 1)

• Accounting Equation: Assets = Liabilities + Owner’s Capital
• Profit & Loss: Profit = Revenue – Expenses
• Difference between bookkeeping & accounting: bookkeeping records transactions; accounting interprets, analyses and reports them.

3.2 Sources & Recording of Data (Block 2)

• Source documents: invoice, receipt, credit note, debit note, purchase order, sales order, bank statement.
• Prime‑entry books: cash book (receipts & payments), sales journal, purchases journal, general journal.
• Double‑entry mechanics: every transaction = at least one debit and one credit; totals of debits = totals of credits.
• Ledger structure: separate accounts for assets, liabilities, capital, revenue and expenses (T‑accounts).

3.3 Verification of Accounting Records (Block 3)

• Trial Balance: list of all ledger balances; used to test the arithmetical accuracy of the double‑entry system.
• Bank Reconciliation: adjusts the cash book balance for deposits in transit, outstanding checks and bank errors.
• Control Accounts: summarise subsidiary ledger totals (e.g., Trade Receivables Control).
• Common errors:
  • Omission – does not affect trial balance.
  • Commission – does not affect trial balance.
  • Single‑side error – affects trial balance.
  • Transposition error – may affect trial balance.

3.4 Accounting Procedures (Block 4)

Procedure	Purpose	Typical calculation
Depreciation (Straight‑Line)	Allocate cost of a non‑current asset over its useful life.	Annual charge = (Cost – Residual value) ÷ Useful life
Depreciation (Reducing Balance)	Charge a fixed % of the written‑down value each year.	Annual charge = Opening WDV × Depreciation rate
Accrued Expenses	Record expenses incurred but not yet paid.	Debit Expense, Credit Accrued Expenses (liability)
Prepaid Expenses	Record payments made in advance of the benefit.	Debit Prepaid Expense (asset), Credit Cash; then expense each period.
Doubtful Debts Provision	Anticipate probable losses on receivables.	Debit Bad Debt Expense, Credit Allowance for Doubtful Debts.
Inventory Valuation (Lower of Cost or NRV)	Ensure inventory is not overstated.	Write‑down if NRV < Cost; debit Loss on Inventory, credit Inventory.

3.5 Preparation of Financial Statements (Block 5)

1. From adjusted trial balance to statements:
   • Identify revenue and expense accounts – transfer to Income Statement.
   • Close revenue & expense accounts to Retained Earnings/Capital.
   • Transfer net profit (or loss) to the Statement of Financial Position.
2. Statement formats for different business types
   • Sole trader / partnership: Statement of Financial Position shows Owner’s Capital (or Partners’ Capitals).
   • Limited company: Statement of Financial Position shows Share Capital and Reserves.
   • Club / non‑profit: Statement of Financial Position shows Fund Balances (Unrestricted, Restricted).
   • Manufacturing business: Include Cost of Goods Sold = Opening Stock + Purchases + Production Costs – Closing Stock.
   • Incomplete records: Use the “adjusted trial balance” method to reconstruct missing figures.

3.6 Analysis & Interpretation (Block 6)

Key ratios – formula, what they reveal, and a note on limitations.

Ratio	Formula (using figures from the Income Statement & Statement of Financial Position)	Interpretation
Gross Profit Margin	Gross Profit ÷ Sales × 100%	Shows how efficiently a business produces its goods.
Net Profit Margin	Net Profit ÷ Sales × 100%	Overall profitability after all expenses.
Current Ratio	Current Assets ÷ Current Liabilities	Short‑term liquidity – ability to pay immediate debts.
Quick (Acid‑Test) Ratio	(Current Assets – Inventory) ÷ Current Liabilities	Liquidity without relying on inventory sales.
Return on Capital Employed (ROCE)	Profit before Interest & Tax ÷ (Capital + Reserves + Long‑term Liabilities) × 100%	Efficiency of capital utilisation.
Debtors’ Turnover	Credit Sales ÷ Average Trade Receivables	How quickly credit sales are collected.
Creditors’ Turnover	Credit Purchases ÷ Average Trade Payables	How quickly the business pays its suppliers.

Limitations of ratios – they are based on historical cost, ignore qualitative factors, can be distorted by seasonality, and are only as reliable as the underlying data.

3.7 Accounting Principles & Policies (Block 7)

• Policy objectives (basic IAS/IFRS awareness):
  • Relevance – information must be capable of influencing decisions.
  • Reliability – free from material error and bias.
  • Comparability – users can identify similarities and differences over time and across entities.
  • Understandability – presented clearly.
  • Faithful representation – complete, neutral and error‑free.
• At IGCSE level you need only know that policies are chosen to meet these objectives and that any change must be disclosed (link to Consistency).

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4. Integrated Summary Table – How the Principles Interrelate

Principle	Key purpose	Links to other principles	Typical exam focus
Business Entity	Separate personal & business affairs	Supports Prudence (avoids overstating assets)	Identify breaches; decide inclusion.
Going‑Concern	Assume continuity of operations	Justifies Historical Cost; affects Realisation	Explain asset valuation assumptions.
Accrual (Matching)	Match revenues with related expenses	Works with Dual‑Aspect (debits/credits) & Prudence	Allocate prepaid/ accrued items.
Dual‑Aspect	Maintain equation balance	Underlying mechanism for all other principles	Provide correct journal entries.
Consistency	Allow comparability over periods	Relies on Materiality & Prudence for disclosures	Explain policy changes.
Materiality	Focus on information that influences decisions	Works with Prudence (avoid immaterial over‑statements)	Judge whether to disclose separately.
Prudence	Avoid over‑statement of income & assets	Interacts with Historical Cost & Materiality	Adjust for doubtful debts, inventory NRV.
Historical Cost	Provide objective measurement	Supported by Prudence; limited by Going‑Concern	State measurement basis.
Realisation	Recognise revenue when earned	Works with Accrual (matching) & Going‑Concern	Determine point of revenue recognition.
Money Measurement	Record only monetary transactions	Underlying assumption for all other principles	Identify non‑monetary items; explain notes.

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5. Flowchart – From Transaction to Financial Statements

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6. Quick Revision Checklist (AO1 – recall)

• Can you define each of the ten accounting principles in one sentence?
• Do you know the purpose of each principle and how it links to the others?
• Can you give a clear, exam‑style example for every principle?
• Are you able to identify which principle is being breached in a given scenario?
• Can you explain the measurement basis (historical cost) and its limitations?
• Do you remember the key formulas for the main profitability, liquidity, efficiency and solvency ratios?

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7. Sample Exam Questions (Mixed AO1‑AO3)

1. Define the Money Measurement principle and give one reason why it is essential.
2. Explain why historical cost is the preferred measurement basis under the Money Measurement principle, citing at least two advantages.
3. Identify which of the following would NOT be recorded in the financial statements: (a) a $2 000 purchase of raw material, (b) a staff member’s morale, (c) a $5 000 loan from a bank, (d) a $1 200 electricity bill.
4. Discuss two limitations of the Money Measurement principle and the effect each limitation could have on users of the accounts.
5. Apply the Accrual (Matching) principle: A business pays $1 200 for a 12‑month insurance policy on 1 July. Show the journal entry on 1 July and the adjusting entry on 31 December.
6. Calculate the Current Ratio and the Gross Profit Margin for the following data: Sales $45 000, Cost of Goods Sold $30 000, Current Assets $12 000, Current Liabilities $8 000.

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8. Further Reading & Practice Resources

• Cambridge IGCSE Accounting (0452) – Student Book – chapters 1‑7.
• Past paper questions (2020‑2024) – focus on “principles” and “ratio analysis”.
• Online video series: “IGCSE Accounting – The 10 Principles” (30‑minute recap).
• Practice workbook: “Money Measurement & Historical Cost – Extra Exercises”.