What is 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. Or, a business cannot record the monetary value of a valuable speech given to employees about how to engage in innovative activities.

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.

Example of the Monetary Unit Principle

Maestro Corporation acquired a corporate headquarters building in Silicon Valley in 1972 for $350,000, and has held onto the property ever since. It is now valued at $20 million, due to the run-up in property values in that area. Despite the difference in valuation, Maestro still reports the value of this property on its balance sheet at the original purchase price, rather than what it would fetch on the open market.

Maestro also has a skilled group of programmers that has developed a hit software app that can produce original pop music hits on demand. The app has generated over $1 billion in sales for the company, and yet the programming skill of the programmers cannot be quantified - so their value to the company is not recorded on its balance sheet at all.