Accounting is a systematic recording, compilation of reports, and analysis of financial transactions of business. Note that a business accountant should only communicate business transactions which can be expressed in monetary units. This is what is known as the monetary unit assumption in accounting (Also see Accrual concept and Business Entity concept).
As an accounting or a financial professional, you should abide by ethical standards that govern what kind of business you conduct, who you serve, and how you use your skills. The Financial Reporting Standards set some of these account ethical standards and accounting principles. Regardless of whether you want to hire an accountant or you want to do the accounting tasks for your business on your own, you should be aware of these accounting standards and principles. One of the accounting principles you should understand is the monetary unit assumption.
The monetary unit assumption is sometimes known as the money measurement assumption. For you to apply this accounting principle, you must ensure that the transactions you are recording are reliably quantifiable in terms of money. For example, if you pay accrued wages of S$3000 to an employee, this transaction can be recorded in your business books because it can be expressed in terms of money. However, this doesn’t mean that the amount must always be exact. In some instances, estimates are used in the preparation of business financial statements.
These are transactions that don’t involve any financial matter and don’t result in a transfer of funds between the buyer and the seller and don’t affect the business financial accounts. For instance, employees are a valuable asset in your business, and you can’t express the value of your employees in terms of money. Also, a business brand name is an important asset, but you can’t attach a monetary value to it. According to the monetary unit accounting principle, you cannot include the value of your business employees in your business books.
Limitations of Monetary Unit Assumption
Though monetary unit assumption offers basis upon which to value business transactions, there are two primary limitations: handling items which are difficult to quantify and inflation.
Keep in mind that the monetary unit assumption doesn’t take into account the effect of inflation. Inflation is the increase of prices of products with time. For example, a product could be bought at S$1 in 1977, but today, it costs S$4. The monetary assumption doesn’t provide basis for accounting for this difference in prices as a result of inflation.
Talk to an accounting firm in Singapore today so to get some professional advices so to ensure your company’s accounts are properly kept.