The monetary unit principle

The monetary unit principle states that you only record business transactions that can be expressed in terms of a currency. Thus, a company cannot record such non-quantifiable items as employee skill levels, the quality of customer service, or the ingenuity of the engineering staff.

The monetary unit principle also assumes that the value of the unit of currency in which you record transactions remains relatively stable over time. However, given the amount of persistent currency inflation in most economies, this assumption is not correct - for example, a dollar invested to buy an asset 20 years ago is worth considerably more than a dollar invested today, because the purchasing power of the dollar has declined during the intervening years. The assumption fails completely if an entity records transactions in the currency of a hyperinflationary economy. When there is hyperinflation, it is necessary to restate a company's financial statements on a regular basis.

Similar Terms

The monetary unit principle is also known as the monetary unit concept and the monetary unit assumption.

Related Courses

Accountants' Guidebook 
Bookkeeper Education Bundle 
Bookkeeping Guidebook