Definition: The monetary unit concept is an accounting principle that assumes business transactions or events can be measured and expressed in terms of monetary units and the monetary units are stable and dependable. In other words, the language of business and finance is money. It doesn’t matter what currency it is as long as it’s stable and can be comparable to other currencies.
What Does Monetary Unit Assumption Mean?
We look at sales figures in dollars, yen, euros, and pounds. Without these units of measurement, we wouldn’t be able to communicate financial information effectively. The monetary unit principle states that transactions and events must be able to be measured in some type of monetary unit in order to be recorded. The monetary units must also be stable.
Currently the FASB does not require that companies recognize inflation in their financial statements. There are a variety of reasons why, but mainly because the United States has enjoyed low inflationary rates for decades. Some day if the US economy changes and the US inflation rates become hyperinflationary similar to countries like Brazil and South Africa, the FASB might change SFAC No. 5 and the expectation for companies to report all financial statements in the US dollar.
Not recognizing the affects of inflation can be a little deceiving for external users, but FASB decided not to worry about it. For example, if a company purchases a building for $100,000 and holds on to it for 30 years, it will still be reported on the balance sheet for the original purchase price not adjusted for inflation. The building could vary well be worth $1,000,000 now because of 30 years of inflation.
The monetary unit principle, however, is not concerned with inflation over time. It deals more with the ability to measure transactions in money without drastic fluctuations in currency values in the short-term.