In accounting, we treat a business and its owners as two separately identifiable
entities. This is sometimes called the "business entity concept." It means that
owners' personal transactions are treated separately from those of the business.
The monetary unit assumption has two parts. The first states that only transactions
that can be measured in money or currency should be recorded. An example of a
transaction that is not recorded on the accounting books is the hiring or firing
of employees, even though this can indirectly affect the company's "bottom line."
The second part of monetary assumption states that there will be one currency used
for recording all transactions. In this course, it is always the Canadian dollar,
unless an example specifies another currency.
This is a basic underlying assumption in accounting. It states that a company or
other entity will be able to continue operating for a period that is sufficient
to carry out its commitments, obligations, and objectives. In other words, the
company will not have to liquidate or be forced out of business in the foreseeable
future (that is, for at least 12 months).
Assets should always be recorded at their cost, rather than their current value,
for the life of the asset. Accountants can show an amount less than the cost due
in order to give a conservative estimate, but they are generally prohibited from
showing amounts greater than the cost. Later in this course, you will learn that
certain types of investments will be shown at fair value, instead of cost.
The accountant assumes that, in the long run, the Canadian or American dollar will
be relatively stable – they will not lose their purchasing power within the country.
This assumption allows the accountant to add the cost of a parcel of land purchased
in 2013 to the cost of land purchased in 1956.
For example, if a two-acre parcel of land cost the company $20 000 in 1956 and a
two-acre parcel adjacent to the original parcel is purchased for a cost of $800 000
in 2013, the accountant will add the $800 000 to the land account and will report the
land account’s balance of $820 000 on the company’s balance sheet.
To say that the dollar's purchasing power has not changed significantly from 1956 to
2013 is quite a stretch. However, the assumption is that the dollar's purchasing power
has not changed.