Monetary Unit Assumption
In accounting we can communicate only those business transactions and other events which can be expressed in monetary units. This is called monetary unit assumption.
There are certain other frameworks for reporting business performance such as triple bottom line which focuses on "people, planet profit" the three pillars; corporate social responsibility reporting, etc. Accounting focuses on the financial aspects of the business and that too for matters which can be expressed in terms of currencies.
One aspect of the monetary unit assumption is that currencies lose their purchasing power over time due to inflation, but in accounting we assume that the currency units are stable in value. This is alternatively called stable dollar assumption.
However, there are exceptional circumstances called hyperinflation when the accounting standards require adjustment of prior period figures.
- The company's property, plant and equipment on 2009 balance sheet amounted to $2 billion. During 2010 inflation was 10%. The monetary unit and stable dollar assumption prohibits any adjustment to current or prior period figures to account for the inflation.
- The BP oil spill in Gulf of Mexico was a natural disaster but accounting only reports the financial impact in the form of claims paid, damages paid, cleanup costs, etc. This is due to the limitation imposed by the monetary unit assumption.
Written by Obaidullah Jan, ACA, CFA