Overview

In economics, unit of account, sometimes called currency unit or monetary unit, is a standard unit of measurement of the market value of goods, services, and other transactions. Also known as a measure of relative worth and a standard of deferred payment, a unit of account is a necessary prerequisite for the formulation of commercial agreements that involve debt. It is one of the functions of money. it is a basis for quoting and bargaining of prices and it is necessary for developing accounting systems.

A given base unit of account (analogous to base unit of measurement) may have derived units of account or subunits; for example, one cent equals a hundredth (1⁄100) of a dollar or other base units of many currencies.

Unit of account in economics allows a somewhat meaningful interpretation of prices, costs, and profits, so that an entity can monitor its own performance. It allows shareholders to make sense of its past performance and have an idea of its future profitability. The use of money, as a relatively stable unit of measure, can tend to drive market economies toward efficiency.

Problems

Money is rarely perfectly stable in real value which is the fundamental problem with traditional historical cost accounting which is based on the stable measuring unit assumption. The unit of account in economics 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 can lead to confusing — (or even meaningless) — results.

History

Coins or moneys of account were in most cases originally based on an existing coin or money but could remain in use as a unit of account even when the original coin or money was no longer in circulation.

Historic examples of units of measure include the livre tournois, used in France from 1302 to 1794 whether or not livre coins were minted. In the 14th century Naples used the grossi gigliati, and Bohemia used the Prague groschen (2021).

At any one time there might be two or three units of account in one region based on the local base, silver and sometimes gold coins, and each often expressed in L.S.D units in ratio 240:12:1. The Florentine gold florin, the French franc and the electoral rheingulden all became pounds (240 denari) of account. Units of account would often survive over 100 years despite the original coins changing composition and availability (e.g. the Castilian maravedi).

Finance

The use of a unit of account in financial accounting, according to the American business model, allows investors to invest capital into those companies that provide the highest rate of return. The use of a unit of account in managerial accounting enables firms to choose between activities that yield the highest profit.

Accounting

The unit of account in financial accounting refers to the words used to describe the specific assets and liabilities that are reported in financial statements rather than the units used to measure them. That is, unit of account refers to the object of recognition or display whereas unit of measure refers to the tool for measuring it.

Unit of measure and unit of account are sometimes treated as synonyms in financial accounting and economics. Unit of measure in financial accounting refers to the monetary unit to be used; that is, whether it should be nominal units of money as opposed to units that are adjusted for changes in purchasing power over time.