Unit of account

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In economics, unit of account is one of the functions of money. A unit of account[1] is a standard numerical monetary unit of measurement of the market value of goods, services, and other transactions. Also known as a "measure" or "standard" of relative worth and deferred payment, a unit of account is a necessary prerequisite for the formulation of commercial agreements that involve debt.

Money acts as a standard measure and a common denomination of trade. It is thus a basis for quoting and bargaining of prices. It is necessary for developing efficient accounting systems.

Economics

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.[citation needed
]

Historically, prices were often given in a dominant currency used as a unit of account, but transactions actually settled by using a variety of coins that were available, and often goods, all converted into their value in the unit of account. Many international transactions continue to be settled in this way, using a national value (most often expressed in the

US dollar or euro) but with the actual settlement in something else.[citation needed
]

In

Consumer Price Index
(Daily CPI) – or a monetized daily indexed unit of account – can be used to index monetary values on a daily basis when it is required to maintain the purchasing power or real value of monetary values constant during inflation and deflation.

Problems

Money is rarely perfectly stable in real value which is the fundamental problem with traditional

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.[2]

History

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

maravedi).[3]

A modern unit of account is the European Currency Unit, used in the European Union from 1979 to 1998; its replacement in 1999, the Euro, was also just a unit of account until the introduction of notes and coins in 2002.

Unit of account is the main way of calculating a carrier or ship owner's liability in relation to carriage of goods contracts in which the

Hague-Visby Rules apply.[citation needed
]

In economics, a standard unit of account is used for statistical purposes to describe economic activity. Indexes such as GDP and the CPI are so broad in their scope that compiling them would be impossible without a standard unit of account. After being compiled, these figures are often used to guide governmental policy; especially monetary and fiscal policy.

In calculating the opportunity cost of a policy, a standard unit of account allows for the creation of a composite good. A composite good is a theoretical abstraction that represents an aggregation of all other opportunities that are not realized by the first good. It allows an economic decision's benefits to be weighed against the costs of all other possible goods in that society, without having to refer to any directly. Often, this is most easily accomplished with money.

Finance

The use of a unit of account in

managerial accounting enables firms to choose between activities that yield the highest profit.[citation needed
]

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.[4]

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.[4]

See also

References

  1. ^ "Functions of Money". boundless.com. 2017-10-11. Archived from the original on October 18, 2015.
  2. ^ The Taxation of Income from Business and Capital in Colombia: Fiscal Reform in the Developing World By Charles E. McLure, John Mutti, Victor Thuronyi, George R. Zodrow, Contributor Charles E. McLure, Published by Duke University Press, 1990, , Page 259 : Inflation destroys the assumption that money 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, makes no sense and leads to results that are void of meaning.(Massone, 1981a. p.6)
  3. .
  4. ^ a b Financial Accounting Standards Research Initiative: The Unit of Account Issue[permanent dead link]

External links

  • Linguistic and Commodity Exchanges by Elmer G. Wiens. Examines the structural differences between barter and monetary commodity exchanges and oral and written linguistic exchanges.