Monetary unit assumption is a concept which requires that accounting transactions and relationships can be measured and recorded in monetary terms only. It is also called Money Measurement Concept. Under this concept, we cannot record only information for which we cannot identify monetary value. So, all non monetary transactions have no place under this assumption. We keep the purchasing power of the money stable under this concept in order to record the accounting transactions but in reality, the currencies lose their purchasing power due to the factors such as inflation.
If the company has very talented top level management and this management is considered as a valuable assets in the industry. Then, accountant cannot record these talented people as the assets over the balance sheet because these people cannot be expressed and measured in monetary units.
Example
1. Alpha company purchased a piece of land for its business operations in 1990 at a cost of $1 million. Due to inflation, the value of this land is now $1.5 million. But, accountant cannot take account of inflation in the balance sheet due to monetary unit assumption.
2. The Beta Industries, who is in cargo and logistics industry, has lost one of its trucks due to a road accident. It needs to be repaired after insurance claim. The accountant can only record the insurance and other expenses in bringing the truck back to its working condition. But he or she cannot record the opportunity cost of revenue not earned due to the truck under maintenance.
Question
One of the leading bank of the country providing various types of services to its customers. It hired one of the top cricketer as its brand ambassador for its advertising campaign which attracted a lot of new customers. New customer gets cricket ball signed by the cricket as a gift from the bank upon availing bank services. Unfortunately, the cricketer has been jailed for taking some money in a match to perform badly. Due to laws and regulations, the bank has to stop the gift to new customer which affects its sales for the current period a lot. But according to the monetary unit assumption, it cannot express the loss of sales due to the ban on the cricketer. Lost sale cannot be recorded as loss because accounting does not take into account hypothecation.
Question
A is a cattle trader. It has monthly sales of around $120 million. Due to heavy rains and thunderstorm, its main camp for the cattle got damaged which caused a lot of cattle’s causalities. Now, A is facing the problem of meeting demand of the customer. This means a shortage of livestock inventory and lower sales. But, in accounting, it could not be recorded as loss of sale on the basis of monetary unit assumption. However, it can record loss of castles, destruction of property and other items as loss expense.