Unit of account

Unit of account

Discussion
Ask a question about 'Unit of account'
Start a new discussion about 'Unit of account'
Answer questions from other users
Full Discussion Forum
 
Encyclopedia
A unit of account is a standard monetary unit of measurement of value/cost of goods, services, or assets. It is one of three well-known functions of money
Money
Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past,...

. It lends meaning to profits, losses, liability, or assets.

The accounting monetary unit of account suffers from the pitfall of not being a stable unit of account over time. Inflation destroys the assumption that money
Money
Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past,...

 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 often leads to invalid results.

Uses


A standard unit of account allows meaningful interpretation of prices, costs, and profits, so that an entity can monitor its own performance and its shareholders can make sense of its past performance and have an idea of its future profitability. In modern economies, money
Money
Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past,...

 in the form of currency
Currency
In economics, currency refers to a generally accepted medium of exchange. These are usually the coins and banknotes of a particular government, which comprise the physical aspects of a nation's money supply...

 usually serves the role of the standard unit of account. The use of money, under conditions of price stability, vastly improves the efficiency of market economies.

Historic examples of units of account include the livre tournois
Livre tournois
The livre tournois |pound]]) was:#one of numerous currencies used in France in the Middle Ages; and#a unit of account used in France in the Middle Ages and the early modern period.-Circulating currency:...

, 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.

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
£sd
£sd was the popular name for the pre-decimal currencies used in the Kingdom of England, later the United Kingdom, and ultimately in much of the British Empire...

 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).

A modern unit of account is the European Currency Unit
European Currency Unit
The European Currency Unit was a basket of the currencies of the European Community member states, used as the unit of account of the European Community before being replaced by the euro on 1 January 1999, at parity. The ECU itself replaced the European Unit of Account, also at parity, on 13...

, used in the European Union from 1979 to 1998; its replacement in 1999, the euro
Euro
The euro is the official currency of the eurozone: 17 of the 27 member states of the European Union. It is also the currency used by the Institutions of the European Union. The eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,...

, 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 owners liability in relation to carriage of goods contracts in which the Hague-Visby Rules
Hague-Visby Rules
The Hague-Visby Rules are a set of international rules for the international carriage of goods by sea. The official title is "International Convention for the Unification of Certain Rules of Law relating to Bills of Lading" and was drafted in Brussels in 1924...

 apply.

Modern 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
Rate of return
In finance, rate of return , also known as return on investment , rate of profit or sometimes just return, is the ratio of money gained or lost on an investment relative to the amount of money invested. The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or...

. The use of a unit of account in managerial accounting enables firms to choose between activities that yield the highest profit.

In economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...

, 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
Opportunity cost
Opportunity cost is the cost of any activity measured in terms of the value of the best alternative that is not chosen . It is the sacrifice related to the second best choice available to someone, or group, who has picked among several mutually exclusive choices. The opportunity cost is also the...

 of a policy, a standard unit of account allows for the creation of a composite good
Composite good
In economics, demand for a good is often the focus as to a change in its price. A composite good is an abstraction used in economics that represents all goods in the relevant budget besides the one in question.-Purpose:...

. 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
Money
Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past,...

.

See also

  • Medium of exchange
    Medium of exchange
    A medium of exchange is an intermediary used in trade to avoid the inconveniences of a pure barter system.By contrast, as William Stanley Jevons argued, in a barter system there must be a coincidence of wants before two people can trade – one must want exactly what the other has to offer, when and...

  • Store of value
    Store of value
    A recognized form of exchange can be a form of money or currency, a commodity like gold, or financial capital. To act as a store of value, these forms must be able to be saved and retrieved at a later time, and be predictably useful when retrieved....

  • Equivalization
    Equivalization
    Equivalization refers to any mathematical method of comparing two or more generally unlike quantity/value scales.A common example of the utility for an equivalization standard comes in currency markets, where without established exchange rates there is great difficulty making comparisons...

  • Inflation accounting
    Inflation accounting
    Inflation accounting is a term describing a range of accounting systems designed to correct problems arising from historical cost accounting in the presence of inflation. Inflation accounting is used in countries experiencing high inflation or hyperinflation...


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.