The monetary unit assumption is an accounting principle which states that all economic events and business transactions should be reflected in monetary terms. In other words, all such events and transactions have a monetary dimension into which they should be converted and then reported on the financial statements.
Explanation:
The monetary unit assumption follows that transactions that cannot be converted to a monetary unit cannot be compared with each other and should not be recorded in the books of account. On the other hand, anything that is converted to money equivalent has excellent comparability. Thus, the monetary unit assumption uses money as a measurement instrument, and the possibility of such a measurement serves as a criterion for determining whether the event or transaction is subject to accounting.
This assumption takes any monetary currency as a measurement parameter without taking into account its specific characteristics, such as inflation and deflation exposure. This idealization has led to the identification of a particular version of this assumption, namely the stable-monetary unit assumption. It presupposes implicitly that the currency is stable and constant in its value.
This assumption removes redundant information about economic events and business transactions that do not have a monetary value from the financial statements. Based on the monetary unit assumption, it is impossible to measure and record any items that are difficult to quantify, even considering that these uncountable data may be more critical to the company and its profitability.
According to this assumption, the value of non-monetary events is not subject to recording and accounting and remains a part of the company’s internal business processes. This principle demonstrates the importance of the items, which have a monetary value, for accounting. The monetary unit assumption is widely used in the United States, and the U.S. dollar is the currency in which economic events and business transactions are measured.