Monetary Unit – What is stable monetary unit concept?
Each and every accountant is needed to plan some important conceptual suppositions when he has to present a report of financial or monetary information. These suppositions are necessary for making a financial report because they contain value. It is said that it is beneficial to know and review these assumptions when you want to check some financial statements. A lot of suppositions come under the head of modern accounting and the concept of stable monetary unit is amongst them.
1. Basic concept of monetary unit:
The core concept of stable monetary unit is that the value of dollar will remain the same over time. So, this concept actually permits the accountants to overlook the results of inflation. On the basis of this supposition, we observe that the old financial documents are not revised even though the worth of money often gets changed. It is important to exercise this concept but this concept can create some severe problems if currency deflates or inflates rapidly and it can be quite problematic.
2. Application of monetary unit:
If we look in to this concept in our routine matters then this concept is different and it means that accountants utilize the records from the separate periods. If the inflation occurs even then the values of different accounts or buying are not being adjusted. The balances get changed by including new buying to the old ones and it is supposed that the money value had remained the same. A purchase that happens after the inflation will appear expensive in the documents. And this difference actually arises only because of the decreased buying ability of the dollar. So, it is permitted to use a nonstop accounting record for a certain period of time for the sake of practical feasibility.
It has been experienced that although monetary unit suppositions make the things easy for the accountants but they also creates many problems too. If it happens that the money value changes rapidly due to certain market conditions or policy then the financial documents become less effective for making comparisons with the past records. If the accountants do not make adjustments in the accounts or statements according to the inflation and deflation then accounting record would become ineffective to disclose the true financial position of a business. So this core issue discloses a link between the routine accounting and the extensive market trends.
4. Policy repercussions:
The role of policy is quite important in maintaining and retaining the currency’s buying power and this role is suggested by the concept of the stable money unit. Jerry Jordon who belongs to the Federal Reserve Bank states that the federal banks and the governments should try their best to save the steady currency. This is because prices give some sound information about expenses of the different services and goods for the business and household purposes. Whereas other professionals say that a policy cannot be effective if the money value is depending on some tangible resources for example gold. It does not whatever the case is; the business people should keep in mind the possible effects of changes in the buying power of dollar while evaluating the past performance and the documents.