Monetary Unit Assumption
Monetary unit assumption (also known as money measurement concept) states that all accounting records should be made in terms of monetary units. All transactions are measured in monetary units and recorded in the books of accounts in terms of money which is generally the currency unit used in the country. In the United States, for example, all accounting records are maintained in terms of US-dollar. A multinational company, however, may maintain accounts in dual currencies.
Explanation of Monetary Unit Assumption
A famous saying is that “Money is that what Money does”. Money acts as a standard unit to measure the value of goods & services. Under the monetary unit assumption, it is assumed that only those transactions which have a monetary value should be recorded in the books of accounts.
In other words, according to this concept, only those transactions are recorded in the books of accounts which can be measured in terms of money. There are some problems like the variation in the value of money, ignorance of qualitative factors like quality of management, growth of competition, etc. In spite of these problems, Money Measurement Concept is acceptable due to its easy adaptability and understandability.
The monetary unit assumption is based on the assumption that all transactions can be measured in money terms. Now it is the standard practice that all documents on which accounting records are based are issued in terms of money; hence maintaining accounting records in terms of money does not offer any problem.
Another important aspect of the monetary unit is an assumption about the stability of the value of the monetary unit. While in reality, inflation results in erosion of the value of a monetary unit, accounting records are based on the assumption that a monetary unit has a stable value.
If the results of operations of a business entity are to be properly accounted for, they need to be expressed and recorded in common units of measurement. It is well-known that a business has many diverse kinds of assets, e.g. land and buildings, government securities and shares of other companies, inventory of raw materials and finished goods as well as cash and claims against debtors.
However, it is hardly possible to add up all these assets as there is no way of adding thousands of square feet of building space with tons of coal and numbers of bank notes because of differences in the physical nature of their measurement units. This problem—which is often referred to as the “apples and oranges” problem—is resolved by adding, for the purposes of accounting, the common economic value of the assets (and liabilities) expressed in monetary terms rather than in any other physical dimensions. It is possible to do so because cash, disparate physical goods and claims against others can usually be expressed in terms of money which in turn lends itself to common measurement and accounting.
However, this concept introduces many difficulties in accounting in the sense that those assets which cannot be accurately expressed in terms of monetary units are not usually reflected in business accounts.
For example, an asset purchased for $12,000 in the year 2003 and another asset purchased for $12,000 in the year 2016 would have the same cost and incur the same depreciation charge for accounting purposes.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.