Definition and explanation
Monetary unit assumption (also known as money measurement concept) states that only those events and transactions are recorded in books of accounts of the business which can be measured and expressed in monetary terms. An information that cannot be expressed in terms of money is useless for financial accounting purpose and is therefore not recorded in books of accounts.
The monetary unit is a simple and universally recognized basis of communicating financial information. It is the most appropriate and effective basis of recording, communicating and analyzing financial data on the basis of which rational business decisions can be made.
A very closely related concept to the monetary unit assumption is the stable dollar value assumption which means that the dollar ( or any other currency) does not lose its purchasing power over time. The fact that the money loses its purchasing power because of inflation is ignored while recording transactions in accounting.
Some examples of monetary unit assumption are given below:
The CEO of Fine Enterprise delivers a lecture to the employees in a special meeting that can be helpful in raising the employees’ morale and completing the current projects on time.
As the value of the lecture cannot be measured in terms of money, it cannot be recorded in the books of accounts of Fine Enterprise.
The Metro company purchased a tract of land for $25,000 in 2005. Because of inflation, the worth of the tract of land is now $40,000.
The Metro company cannot adjust its balance sheet because the monetary unit assumption enforces it to ignore the impact of inflation.
The Fast transport company has five trucks. One of its truck is seriously damaged in a road accident and is being repaired.
The company can only account for the amount of insurance or any expenses that it actually has to pay to get the truck in working condition but cannot record the loss of revenue caused by the time the truck takes to be overhauled.