The monetary unit assumption is based on the assumption that all transactions can be measured in money terms. GAAP assumes that the monetary unit is stable, reliable, relevant, and useful to all companies. All currencies are openly exchanged in world markets with varying exchange rates. Monetary units like the US dollar and English pound can be easily exchanged for the European Union Euro, Mexican peso, or the Japanese yen.

1. The cost principle, also known as the historical cost principle, states that virtually everything the company owns or controls (assets) must be recorded at its value at the date of acquisition.
2. As you may also recall, GAAP are the concepts, standards, and rules that guide the preparation and presentation of financial statements.
3. The app has generated over $1 billion in sales for the company, and yet the programming skill of the programmers cannot be quantified – so their value to the company is not recorded on its balance sheet at all.
4. In baseball, and other sports around the world, players’ contracts are consistently categorized as assets that lose value over time (they are amortized).

Under those circumstances the assumption is that the monetary unit is stable and is not impacted by inflation or deflation. The monetary unit assumption is one of the fundamental underlying assumptions used in accounting when preparing financial statements. Currently the FASB does not require that companies recognize inflation in their financial statements.

Non Monetary Transactions

There are some exceptions to this rule, but always apply the cost principle unless FASB has specifically stated that a different valuation method should be used in a given circumstance. The BP oil spill in Gulf of Mexico was a natural disaster but accounting only reports the financial impact in the form of claims paid, damages paid, cleanup costs, etc. Financial accounting is mainly concerned with impact of transactions and events which can be quantified in terms of currency units. If a company or its stakeholders are concerned with other aspects of its strategy and operations, other reporting frameworks, such as triple bottom line, corporate social responsibility reporting, etc., are more relevant.

The conceptual framework helps in the standard-setting process by creating the foundation on which those standards should be based. It can also help companies figure out how to record transactions for which there may not currently be an applicable standard. Though there are many similarities between the conceptual framework under US GAAP and IFRS, these similar foundations result in different standards and/or different interpretations.

How does the monetary unit assumption affect balance sheet accounts?

The role of the Auditor is to examine and provide assurance that financial statements are reasonably stated under the rules of appropriate accounting principles. The auditor conducts the audit under a set of standards known as Generally Accepted Auditing Standards. The accounting department of a company and its auditors are employees of two different companies. The auditors of a company are required to be employed by a different company so that there is independence. The monetary unit assumption assumes that all business transactions and relationships can be expressed in terms of money or monetary units. Money is the common denominator in all economic activity and financial transactions.

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. Under the monetary unit assumption, it is assumed that only those transactions with monetary value should be recorded in the books of accounts. The cost principle, also known as the historical cost principle, states that virtually everything the company owns or controls (assets) must be recorded at its value at the date of acquisition. For most assets, this value is easy to determine as it is the price agreed to when buying the asset from the vendor.

Monetary Measurement Concept

In order to record a transaction, we need a system of monetary measurement, or a monetary unit by which to value the transaction. Without a dollar amount, it would be impossible to record information in the financial records. It also would leave stakeholders unable to make financial decisions, because there is no comparability measurement between companies. This concept ignores any change in the purchasing power of the dollar due to inflation. The primary exceptions to this historical cost treatment, at this time, are financial instruments, such as stocks and bonds, which might be recorded at their fair market value. This is called mark-to-market accounting or fair value accounting and is more advanced than the general basic concepts underlying the introduction to basic accounting concepts; therefore, it is addressed in more advanced accounting courses.

For the past 52 years, Harold Averkamp (CPA, MBA) hasworked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university creative accounting definition instructor, and innovator in teaching accounting online. 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. 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. We define an asset to be a resource that a company owns that has an economic value.

Debits and Credits

Dividends paid to shareholders also have a normal balance that is a debit entry. Since liabilities, equity (such as common stock), and revenues increase with a credit, their “normal” accumulated depreciation balance is a credit. The procedural part of accounting—recording transactions right through to creating financial statements—is a universal process. Businesses all around the world carry out this process as part of their normal operations.

Publicly traded companies (those that offer their shares for sale on exchanges in the United States) have the reporting of their financial operations regulated by the Securities and Exchange Commission (SEC). Additionally the assumption is sometimes referred to as the money measurement assumption or the money measurement concept. It is important to realize that the assumption simply means that only transactions that can be quantified in monetary terms are recorded in the accounting records. In particular, income must be recorded in that form which can then be expressed in terms of money.

For example, there is no way to add up thousands of square feet of building space with tons of coal and numbers of banknotes. Textbook content produced by OpenStax is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License . The OpenStax name, OpenStax logo, OpenStax book covers, OpenStax CNX name, and OpenStax CNX logo are not subject to the Creative Commons license and may not be reproduced without the prior and express written consent of Rice University. Our mission is to empower readers with the most factual and reliable financial information possible to help them make informed decisions for their individual needs.

A financial professional will offer guidance based on the information provided and offer a no-obligation call to better understand your situation. Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications. Our work has been directly cited by organizations including Entrepreneur, Business Insider, Investopedia, Forbes, CNBC, and many others. The articles and research support materials available on this site are educational and are not intended to be investment or tax advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Assets and liabilities should be stated at cost less any subsequent adjustments to the cost of assets through Depreciation or amortization.

Another part of the monetary unit assumption is that U.S. accountants report a corporation’s assets as dollar amounts (rather than reporting details of all of the assets). If an asset cannot be expressed as a dollar amount, it cannot be entered in a general ledger account. For example, the management team of a very successful corporation may be the corporation’s most valuable asset.

Conservatism states that if there is uncertainty in a potential financial estimate, a company should err on the side of caution and report the most conservative amount. This would mean that any uncertain or estimated expenses/losses should be recorded, but uncertain or estimated revenues/gains should not. This gives stakeholders a more reliable view of the company’s financial position and does not overstate income. You also learned that the SEC is an independent federal agency that is charged with protecting the interests of investors, regulating stock markets, and ensuring companies adhere to GAAP requirements. By having proper accounting standards such as US GAAP or IFRS, information presented publicly is considered comparable and reliable.

The sign is spray-painted over, the windows are broken, and some merchandise is stolen. The retailer’s financial statements will only report a loss on the damaged property. It will not report lost potential sales due to down time wait for repairs or additional inventory because of the monetary unit assumption. 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.