Monetary Unit Assumption is the accounting principle that concern about the valuation of transactions or event that entity records in its financial statements.
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. USD is the main example of a stable currency.
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.
The following is the detail explanation of the monetary unit assumption.
For example, the inventories that the company purchased for resales have their own values and can be measured in currency, USD. These kinds of inventories could be recorded in the Financial Statements.
However, the staff’s skill could not record in the financial statements as assets. And staff turnover cannot record as the lost or liabilities. Staff de-motivation will turn out to be the cost of the company.
But, we can not measures and records this de-motivation cost in Financial Statements.
Based on Monetary Unit Assumption, you cannot measure and records beautiful customer service staff in Financial Statements, but you can record telling machine based on its value even though customer staff benefit to the company better than telling machine.
The currencies that use to measure the transaction or event in the financial statements normally are stable and internationally recognized. For example, USD is the currency that internationally recognize and quite stable.
The entity could measure the transactions and event in its own country currency if that currency is stable and internationally recognized.
Example of Monetary Unit Assumption:
In general, most of the financial statements are present in USD as it is the most effective way to communicate economic activities. Whenever there is inflation or deflation, the accounting transaction could be changed and they are ignoring.
Noted: When there is inflation, the value of assets and liabilities are not change in the Financial Statements based on Monetary Unit Assumption. However, assets are impaired if carrying value is less than fair value.
For example, in 2015, the entity purchased fixed assets value 5,000 USD and then in 2016, there is inflation.
The fixed assets then require 6,000 USD to purchase. 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.
The entity needs to perform fixed assets revaluation for all of the fixed assets in the entity. This revaluation could not base on the selection of fixed assets.
The buildings that have original cost USD 20,000,000 can not be changed to USD 50,000,000 due to increasing of current material and labour and well as the effect of inflation and time value of money. But they could be revalued and present in the Financial Statement.
Monetary Unit Assumption:
- The transaction and even that can measure in currency, Example.
- Can not record the transaction that could not measure in currency.
- The dollar is the most effective way to communicate economic activities.
- Only transaction that can express in the monetary term that can record in financial statements.
- Inflation and deflation are ignored in accounting records.
- Money is universal, understandable, comprehensible, and the simplest way to convey financial activities.
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Written by Sinra