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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. 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.
In historical cost accounting, currencies are assumed to be perfectly stable in
real value during non-hyperinflationary conditions under in terms of which the
stable measuring unit assumption is applied. The Daily 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 generally never 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:
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). 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.
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 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.
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