Monetary Unit Assumption: Definition
The monetary unit assumption states that all accounting records should be made in terms of monetary units. The monetary unit assumption is also known as the money measurement concept.
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 a country.
In the United States, for example, all accounting records are maintained in terms of the US dollar. A multinational company, however, may maintain accounts in dual currencies.
Monetary Unit Assumption: Explanation
A famous saying is: Money is what money does. This means that money acts as a standard unit to measure the value of goods and services.
Under the monetary unit assumption, it is assumed that only those transactions with monetary value should be recorded in the books of accounts.
In other words, according to this concept, the only transactions that should be recorded in the books of accounts are those that can be measured in terms of money.
Problems can arise due to variations in the value of money and ignorance of qualitative factors such as quality of management and growth of competition. However, the money measurement concept is accepted for its adaptability and understandability.
The monetary unit assumption is based on the assumption that all transactions can be measured in money terms.
Now, it is standard practice for documents on which accounting records are based to be issued in terms of money. For this reason, maintaining accounting records in terms of money does not lead to any problems.
Another important issue is the assumption about the stability of the monetary unit’s value. In reality, inflation erodes the value of monetary units, but accounting records are based on the assumption that a monetary unit has a stable value.
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.
It is well-known that a business may have diverse kinds of assets, including land and buildings, government securities and shares of other companies, inventories of raw materials and finished goods, and cash and claims against debtors.
However, it is impossible to add up all a company’s assets in a direct way. For example, there is no way to add up thousands of square feet of building space with tons of coal and numbers of banknotes.
This is due to differences concerning the physical nature of the measurement units.
This problem—often referred to as the “apples and oranges” problem—is resolved by adding, for the purposes of accounting, the common economic value of assets (and liabilities) expressed in monetary terms rather than other physical dimensions.
It is possible to resolve the apples and oranges problem in this way because cash, disparate physical goods, and claims against others can usually be expressed in terms of money. As such, money lends itself to common measurement and accounting.
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.
Under the monetary unit assumption, an asset purchased for $12,000 in 2003 and another asset purchased for $12,000 in 2016 would have the same cost. They would incur the same depreciation charge for accounting purposes.