The monetary unit assumption is one of the fundamental underlying assumptions used in accounting when preparing financial statements.
The assumption is sometimes referred to as the money measurement assumption or the money measurement concept, and simply means that only transactions that can be quantified in monetary terms are recorded in the accounting records of the business.
For example, if a business pays accrued wages of 5,000 to a employee, the transaction can be recorded as it can be quantified in monetary terms. The transaction is recorded as follows:
Although the application of the monetary unit assumption means the transaction must be reliably quantifiable in monetary terms, it does not mean that the amount has to be precise. Estimates are often used in the preparation of financial statements, providing the amount is reasonably estimated, the monetary unit assumption is satisfied and the transaction can be recorded.
Non Monetary Transactions
In contrast to the transaction above, although the employees are a valuable asset of the business, since a reliable monetary amount cannot be placed on this value, the monetary unit assumption does not allow the transaction to be recorded in the accounting records.
It should be noted that a transaction which does not satisfy the monetary unit assumption (because it cannot be quantified in monetary terms) might still be identified in a note to the accounts, if it is material and helps give the user a better understanding of the financial position of the business.
Stable Monetary Unit Assumption
The application of the monetary unit assumption also recognizes that transactions from one year can simply be added to transactions from another year. For example, an asset costing 5,000 in say 1990, can be added to another asset costing 10,000 in say 2016, to give a combined cost of 15,000. The assumption is that the monetary unit is stable and is not impacted by inflation or deflation.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.