Monetary unit
assumption has two important facets, firstly it reiterates about the stability
of the store of value. Secondly, only those transactions qualify for the
recognition in the financial records that can be quantified in the monetary
amounts. Non financial transactions do not make part of the financial
statements following the principle of the monetary unit assumption.
It is an important
accounting principle having the premise in relation to the stability of the
Dollar value which implies that it does not lose the purchasing power in the
long run and thus yielding the reliability in relation to the reported amounts
of the assets, liabilities and equity.
The benefit of this principle is that it lets the bookkeepers and the
accountants to add the items that are similar in characteristics
notwithstanding their respective point of occurrence of the transaction. For
instance, it does not matter if the two pieces of land are purchased in
different time periods say for example the respective purchases of the pieces
of land are 10 years apart, the monetary unit assumption calls for the
integration of the two costs as they are similar items and monetary unit
assumption says about stability of the dollar amounts. The aggregate amount can
be subsequently reported on the face of the balance sheet as a single
line-item.
The second implication
of the monetary unit assumption is also very important in relation to the
preparation of the financial statements. No item can be reported unless it is a
monetary figure. The non financial information cannot be recognized in the
financial statements. The example that can be quoted in this regards is of the
management. The management of any specific organization is an important asset.
The skills level and experience of the management drive the organization ahead
in relation to its operations. However, there is no way that you can quantify
the skills level of the management team. Likewise you have no control over the
management team. This is why the skills level of the management team is not an
assets and does not qualify for the presentation on the face of the balance
sheet which present all the assets, liabilities and equity elements of the
organization on the face.
Advantage
of the Monetary Unit Assumption
Looking at the revenue
and sales figure of any specific organization we find that they are reported in
different currencies such as yen, Euros, dollars and pounds. If we do not have
these measurement units, the financial information cannot communicated,
reported. Eventually there would be no comparability and financial analysis of
the information presented leading to the lack of planning and control
process. The currencies of different
economies used to be relatively stable over the timeline period which helps in
the application of the monetary unit assumption that in order to record a
certain amount, it must be in the monetary amount along with the stability of
the monetary amounts.
At the present point of
time, FASB, the American body for that set out pronouncements in relation to
the presentation and preparation of the financial statements does not require
inflation adjusted amounts to be reported. That rationale may be that US
economy is relatively stable in terms of inflation. It might be possible that
in future American economy suffers inflationary trends and resultantly there is
change in the reporting requirements that calls for inflation adjusted figures
in contravention of the monetary unit assumption.
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