Unit of account

A unit of account in economics is a nominal monetary unit of measure or currency used to represent the real value (or cost) of any economic item; i.e. goods, services, assets, liabilities, income, expenses. It is one of three well-known functions of money. It lends meaning to profits, losses, liability, or assets.

A unit of account in financial accounting refers to the words that are used to describe the specific assets and liabilities that are reported in financial statements rather than the units used to measure them. Unit of account and unit of measure are sometimes treated as synonyms in financial accounting and economics.

Historically, prices were often given in a dominant currency used as a unit of account, but transactions actually settled by using a variety of coins that were available, and often goods, all converted into their value in the unit of account. Many international transactions continue to be settled in this way, using a national value (most often expressed in the US dollar or euro) but with the actual settlement in something else.

The unit of account in economics (unit of measure in accounting) suffers from the pitfall of not being stable in real value over time because money is generally not perfectly stable in real value during inflation and deflation. Inflation destroys the assumption that the real value of the unit of account is stable which is the basis of classic accountancy. In such circumstances, historical values registered in accountancy books become heterogeneous amounts measured in different units. The use of such data under traditional accounting methods without previous correction often leads to invalid results.

All monetary units of measure, e.g., US dollar, euro, yen, yuan, ruble, peso, PKR, INR etc. (all fiat currency units) are assumed to be perfectly stable in real value during non-hyperinflationary conditions under traditional Historical Cost Accounting in terms of which the stable measuring unit assumption is applied. The Daily Consumer Price Index (Daily CPI) – or a monetized daily indexed unit of account – is generally used to index monetary values on a daily basis when it is required to maintain the purchasing power or real value of monetary values constant during inflation and deflation.

A monetary unit of account (unit of measurement) in economics allows meaningful interpretation of prices, costs, and profits, so that an entity can monitor its own performance and its shareholders can make sense of its past performance and have an idea of its future profitability. In modern economies, money in the form of currency usually serves the role of the unit of account (unit of measurement). The use of money, as a relatively stable unit of measure, improves the efficiency of market economies. However, money is generally never perfectly stable in real value which is the fundamental problem with traditional Historical Cost Accounting which is based on the stable measuring unit assumption.

This page was last edited on 10 February 2018, at 22:39 (UTC).
Reference: https://en.wikipedia.org/wiki/Unit_of_account under CC BY-SA license.

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