Question

Explain how a business may properly use the assumption Monetary Unit Assumption in their business

Answer 1

This assumption states that information in the financial statements must be expressed in monetary units. The reason is that economic activity is expressed in monetary unit, and thus, it makes sense to apply the same basis for accounting purposes. Monetary units are relevant, universally available, and understandable. Using the Restaurant as an example, the intrinsic value of the food taste made by their Chef cannot be valued in the financial statements, regardless of how many customers frequent the Restaurant due to this Chef. The inherent value of this person cannot be quantified in the financial statements as an asset.

The monetary unit assumption also states that a stable unit of currency is to be used as the unit of record. In the United States, the US Dollar is typically the currency of choice. Important to note, accounting ignores inflation or deflation and assumes that US Dollar remains reasonably stable. For instance, no adjustments are necessary when adding 1998 dollars to 2018 dollars, unless economic conditions change dramatically (e.g. hyperinflation)