Monetary unit principle - What is the monetary unit principle?
The monetary unit principle is the assumption that money itself is treated as a unit of measurement, and that all transactions or economic events recorded in the accounts of a business can be expressed and measured in monetary terms by a currency.
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The monetary principle explained
Isn’t it strange how “money” can be both a tangible and intangible good? You might go to the grocery store, and pay your bill with a physical £10 cash note. Whereas other times, you might be booking a flight ticket online, and pay for it via a credit card transfer - money which you will never physically see. The similarity here is that money holds one strong characteristic - it has value.
One of the generally accepted accounting principles is the monetary unit principle. The monetary unit principle states that business transactions should only be recorded if they can be expressed in terms of a currency. In other words, anything that is non-quantifiable should not be recorded a business’ financial accounts.
Over time, money has been adopted as a measurement unit in accounting. According to the monetary unit principle, when business transactions or events occur, they are first converted into money, and then recorded in the financial accounts of a business.
The monetary unit principle simply applies to the monetary expression of economic events, and business transactions. As an accounting principle, the monetary unit ensures that everything which is recorded in the [financial statements](/dictionary/financial-statement of a business can be measured in monetary terms by currencies which are stable and reliable.
Measurement in monetary terms qualifiers
As aforementioned, the monetary unit principle states that businesses should only record transactions which can be expressed in monetary terms, such as the unit of currency.
This therefore means that items which are non-quantifiable should be omitted from the accounts of a business. An example of non-quantifiable items include customer service quality, employee skill level, management expertise, employee motivation, time lost due to damages or reparation etc.
For example: Consider you work in a company where twice a year the CEO gives a highly valued lecture to all employees about morale and motivation in your work environment. This lecture can not be recorded in your business financial accounts, because it can not be measured in terms of money.
Monetary unit principle and currency
One of the assumptions of the monetary unit principle is that the value of the unit of currency (in which you are working with) is stable. This means that in everyday use, the monetary unit allows accountants to treat financial accounts of a business which have been recorded from different financial periods, as if they were the same. This principle therefore does not consider the concept of inflation.
For example: Imagine you purchase a building for £20 000 in 2010, and you record this amount in the accounts of your business. However, because of inflation, that same building is now worth £50 000 in 2018. You can not make the necessary adjustment in the accounts of your business for the difference in value, because of the monetary unit assumption. You are therefore forced to ignore the impact of inflation.
Debitoor and accounting principles
The monetary unit principle is one of the accounting principles which is universally recognised, as a communication of financial information. It is important that you comply with these principles when recording the financial activities of your business. It can often be useful to follow the guide of an invoicing software such as Debitoor to ensure that your accounting is efficient and in order.
