Monetary unit assumption

In accounting, monetary unit assumption is a general principle of accounting accepted all over the world which means that:

  • financial information is measured and expressed in units of currencies; and
  • it is assumed that currency is stable and does not require any adjustment for inflation (this concept of accounting is also known as stable dollar assumption)

It means that in accounting, only those transactions are recorded in the books of account which can be measured in terms of currency. For instance, a multinational company recognizes the value of its human resources and pays special attention towards their training and development needs. During office hours, a daily session is arranged for young professionals to equip them with the expertise required for the job. This training will be fruitful for the company in future, but as this benefit is intrinsic and cannot be measured in terms of money, therefore nothing is recorded in the books of account.

So, the first part of the monetary unit assumption is that only those transactions are recorded in the books of account which can be measured in terms of currency. But what about the transactions recorded in the books. Purchasing power of currency tends to change over time, so do we need to adjust the books of account every now and then to account for the effect of inflation? No! this is the second  part of the monetary unit assumption which saves the accountants from this hassle. In accounting, it is assumed that currency is stable and no adjustment to the recorded transactions is required for inflation. For instance, a company purchased a building for its factory premises several years ago for $20,000. Now its value is around $100,000. Irrespective of the current value of building, the recorded amount will not be adjusted in the books of account.