Question

Define monetaty unit assumption and its importance.

Answer 1

Hey buddy !!

Monetary unit assumption states that only those events and transactions are recorded in books of accounts of the business which can be measured and expressed in monetary terms. An information that cannot be expressed in terms of money is useless for financial accounting purpose and is therefore not recorded. Qualitative terms are never recorded or accounted in books as they don't have an economic value.The monetary unit is a simple and universally recognized basis of communicating financial information. It is the most appropriate and effective basis of recording, communicating and analyzing the financial data based on which rational business decisions can be made.A related concept to the monetary unit assumption is the stable dollar value assumption which means that the dollar ( or any other currency) does not lose its purchasing power over time. The fact that the money loses its purchasing power because of inflation is ignored while recording transactions in accounting.

Examples

1. The CEO of Kit Inc. delivers a lecture to the employees in a special meeting that can be helpful in raising the employees’ morale and completing the current projects on time. As the value of the lecture cannot be measured in terms of money, it cannot be recorded in the books of accounts of Kit Inc.
2. The Metro company purchased a tract of land for $25,000 in 2005. Because of inflation, the worth of the tract of land is now $40,000. The Metro company cannot adjust its balance sheet because the monetary unit assumption enforces it to ignore the impact of inflation.

Importance

This assumption is important to have an understanding which transactions have to be recorded and which not to be recorded and also helps to quantify the transaction and record the same.

Please feel free to ask in case any clarification is required and don't forget to give your valuable feedback.