Unit of account has different specifics and meanings based on its use in distinct dynamics of entities. In the financial market, the value of every item deserves to get measured in a particular currency. It allows market experts and analysts to compare other products against each other and ascertain their valuation on the scale of quality, weightage and other parameters.
For example, income, goods, services, liabilities, labour etc. get valued based on a yardstick or a unit of account. It gives meaning to profit, losses, gains and many other entities.
In Economics
In economics, one can refer the unit of account as one of the monetary functions. The cost or value of an item, asset, service or a product depends on it. The aptitude gives an option for an entity to check its performance through money and make changes to improve further.
It paves a path for shareholders to check the output of profit and losses and decide on their strategies for future investments. Money is a relatively stable unit. Thus, its usage has the fuel to drive economies of the market toward a safe haven and efficiency.
In the past, the prices of products were settled in a dominant currency, as a unit of measure. However, a variety of coins were prevalent for transactions. They were converted to the value of the unit of account.
Interestingly, several international transactions continue to follow the process. They use a national value like the Euro or the US dollar, and actual settlement is in a different currency.
As per the historical cost accounting, in case of non-hyperinflationary situations, currencies are considered stable in real value. In those terms, the stable measuring unit gets applied.
Read More: Learn About The Internal Rate of Return and Uses
PS:- For maintaining the purchasing power, the daily CPI (consumer price index) can be utilised daily.
Some Disadvantages
In general, money is not stable in its real value that casts a fundamental problem in the account of the historical cost accounting. Its basis is a stable measuring unit assumption. During inflation and deflation, the value of money remains destabilised.
Inflation chickens out the theory of assumption that the ‘unit of account’ stands stable as in the case of classic accountancy.
Unit of Account in Financial Accounting
Unit of account gives a path to traders to invest funds into those companies that offer a higher rate of return, as per the American business model.
The unit here refers to the phenomena or measurement that describes liabilities and assets reported in financial statements. Here, the unit of account recognises an object.
Interestingly, the unit of measurement and unit of account get traded as synonyms in economies and financial accounting.
In managerial accounting, a unit of account enables firms to pick those activities that yield high profits.
In financial accounting, the unit of measure: Monetary unit (which is to be used).
