Monetary Unit Assumption: Definition Explanation Example

In general, communities only use a single measure of value, which can be identified in the prices of goods listed for sale. There might be multiple media of exchange, which can be observed by what is given to purchase goods (“medium of exchange”), etc. In most countries, the government acts to encourage a particular forms of money, such as requiring it for taxes and punishing fraud. In most major economies using coinage, copper, silver, and gold formed three tiers of coins.

• However, with the increasing globalization of business and trade, it becomes imperative to harmonize this assumption across borders to ensure consistency and comparability in financial reporting.
• From an accountant’s perspective, the monetary unit assumption simplifies the process of recording transactions.
• We follow strict ethical journalism practices, which includes presenting unbiased information and citing reliable, attributed resources.
• Currently, a team of engineers was invited to repair the plant so that operations could be resumed as early as possible.
• By effectively managing and applying this principle, businesses can provide stakeholders with reliable information that supports informed decision-making and enhances overall financial health.
• While historical costs remain unchanged, understanding an asset’s current state is essential for effective management.

Creation of money

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Not take into account the inflation

Inflation is a general increase in the prices of goods and services in an economy. This means that the purchasing power of a currency diminishes over time as the cost of goods and services rises. One problem with the monetary unit assumption is that it disregards the effects of inflation when recording.

Example of the Monetary Unit Principle

• Hence, the management team will not be included in the reported amounts on the balance sheet.
• This is called bimetallism and the attempt to create a bimetallic standard where both gold and silver backed currency remained in circulation occupied the efforts of inflationists.
• This economic phenomenon was a slow and gradual process that took place from the late Tang dynasty (618–907) into the Song dynasty (960–1279).
• Importantly, this concept introduces many complexities in accounting in the sense that assets which cannot be accurately expressed in terms of monetary units are not usually reflected in business accounts.
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• To properly account for the results of the operations of a business entity, the results need to be expressed and recorded in common units of measurement.
• The monetary unit assumption states that all accounting records should be made in terms of monetary units.

This helps them to understand the company’s performance, assess monetary unit concept its financial situation and compare it with other firms. In this case, the fixes assets valuation in the financial statements could not change. However, if the entity wants to change the value of assets in the financial statements. In general, most of the financial statements are present in USD as it is the most effective way to communicate economic activities.

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Monetary Unit Assumption: The Currency Basis of Accounting

It gives a quantifiable value to any activity, making it easier to record that activity in the financial statements. Currently the FASB does not recognize the affects of inflation in financial reporting. In contrast to the transaction above consider employees, who are a valuable asset of a business. Since a reliable monetary amount cannot be placed on this value, the monetary measurement assumption does not allow transactions relating to the value of employees to be recorded in the accounting records.

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However, these skills and experience cannot be quantified in terms of money and hence, would not appear as an asset in the company’s financial statements. Intangible assets like brand value or intellectual property often do not get recorded under this principle unless acquired through purchase. Financial statements prepared under the monetary unit principle are more reliable because they are based on verifiable data. Stakeholders can trust that reported values reflect actual expenditures rather than speculative estimates. To properly account for the results of the operations of a business entity, the results need to be expressed and recorded in common units of measurement. Now, it is standard practice for documents on which accounting records are based to be issued in terms of money.

If you ever read the financial statements of an entity, you will note that all the transactions and event in the financial statements are records and present in the monetary term for example USD or other currency. In Monetary Unit Assumption, transactions or event could be recorded in the Financial Statements only if they could measure in the monetary term where those currencies are stable and reliable. A company’s property, plant, and equipment on 20X9 statement of financial position amounted to $2 billion. The monetary unit and stable dollar assumption prohibits any adjustment to current or prior period figures to account for the inflation. The monetary unit assumption becomes less important as accounting standards allow more transactions to be accounted for under the fair value model.