1.2.3 Monetary Unit

The monetary unit assumption means that the accounting is based on the measurement of currency with currency stability. Because only in the situation of currency being stable or relatively stable, the asset value at different points of time can be comparable, the income and expense during the same period can be compared, operating results can be calculated and determined, and the accounting information provided by the financial statements can truly reflect the operating condition of an enterprise.

Money is the common ground of business. For example, countries with the monetary unit of dollar are the Unites States and Canada, and those of peso are Mexico, Philippines, Chile, etc.. Which money to be chosen as the monetary unit of an enterprise depends on the country in which it operates. However, many companies are preparing financial reports with more than one monetary unit. The monetary unit assumption requires that an enterprise only record those transactions that could be reflected by money. This assumption also enables the economic events to be accountable.

In various countries, the stability of monetary unit has always been a big problem. The loss in value of money is called inflation. In some countries, the inflation rate of each year has been more than 300%. In those countries where inflation has been so significant, the financial statements need to be adjusted by an inflation factor so as to realize the significance of money as a unit of measurement.

This assumption fails to include some of the relevant information in the accounting records, such as the health of a company’s owner, the quality of service, the morale of employee and etc.. The reason is that although this kind of information is very important, enterprises cannot quantify them into monetary terms.The accounting just records transactions and events that can be measured in money.