08 Sep Monetary Unit Assumption – Explained 2022
Monetary unit assumption affirms that only transactions which can be computed in financial terms are documented in a company’s books of accounts. If a transaction cannot be articulated in dollar value, it should not be incorporated in the company’s financial books. It is believed to be worthless for financial accounting purposes.
The Monetary unit assumption is a simple and collectively recognized form of communicating financial information. It is an efficient basis of recording; reporting and scrutinizing financial data which can help businesses make reasonable decisions.
Money performs numerous key functions, making it significant to be the major form of financial communication for businesses:
It is a medium of exchange
It acts as a store of value
It is used as a standard of deferred payments
It is a unit of account
Assets, revenues, liabilities, and expenditures have to be documented at their dollar values or any other monetary unit. Nevertheless, this may be quite complex to do in certain situations. A company’s supreme strength could be the ability and capacity of its business or engineering team.
This is considerably harder to put a monetary value upon and so, will not be deemed for enclosure in the books of accounts. This is because the company is allowable to only incorporate those transactions that have a financial value.
Implications of Monetary Unit Assumption
There are certain connotations that come with the convention of Monetary Unit Assumption:
- A company has to record each transaction in a financial unit. The reason for this is that the monetary unit fetches a lot of constancy in the long run.
- A company has to record each business event in a fiscal unit i.e. USD. This is because the monetary unit carries constancy in the long run.
- A company’s books must include only those events and transactions that can be computed in the form of a monetary unit. If an event or transaction cannot be assessed in dollar form, it should not be incorporated in a company’s books of accounts.
Monetary unit assumption aids in making accounting simpler, as companies do not have to change long-term assets to their current value each year. The most efficient way to correspond economic activities is through the dollar. It renders a quantifiable value to any activity, making it simpler to record that activity in the financial statements.
Money is worldwide, intelligible, comprehensible, and the easiest way to communicate financial activities. It is the common denominator in all monetary and economic transactions. This is why it makes for an excellent basis when comparing companies and other accounting dimensions. In other words, accounting considers transactions that can be corresponded in financial value.