What is the monetary unit assumption?

Definition of Monetary Unit Assumption

The monetary unit assumption as it applies to a U.S. corporation is that the U.S.dollar (USD) is
stable in the long run. That is, the USD does not lose its purchasing power. Note that this is the
assumption.

As a result of the monetary unit assumption, accountants at a U.S. corporation do not hesitate
to add the cost of a parcel of land purchased in 2021 to the cost of another parcel of land that
had been purchased in 2001.

Another part of the monetary unit assumption is that U.S. accountants report a corporation's
assets as dollar amounts (rather than reporting details of all of the assets). If an asset cannot be
expressed as a dollar amount, it cannot be entered in a general ledger account. For example,
the management team of a very successful corporation may be the corporation's most valuable
asset. However, the accountant is not able to objectively convert those talented people into
USDs. Hence, the management team will not be included in the reported amounts on the
balance sheet.

Example of Monetary Unit Assumption

Let's illustrate the monetary unit assumption with a hypothetical example. Assume that a U.S.
corporation purchased a two-acre parcel of land at a cost of $80,000 in 2001. Then in 2021 the
corporation purchased an adjacent (nearly identical) two-acre parcel at a cost of $500,000.
After the 2021 purchase is recorded, the balance in the corporation's general ledger account
Land is $580,000. Therefore, the corporation's balance sheet will report its four acres of land at
a cost of $580,000. There is no adjustment for the difference in purchasing power between the
2001 dollar and the 2021 dollar.
What is the difference between assessed value and
appraised value?
Definition of Assessed Value

Assessed value will likely be the amount that a local or state government has designated for
individual properties. This assessed value is used in determining the amount of property tax
that the property owner will be assessed and will owe.

Example of Assessed Value

Assume that a company's warehouse is located in a city. The city tax assessor is responsible for
determining the assessed value for every parcel of land and every building within the city. The
city government then establishes a real estate tax rate to be applied to the assessed values.
(There could also be assessed values for personal property.)

The assessed values of real estate or personal property are not necessarily equal to the
property's current market value.

Definition of Appraised Value

Appraised value is the amount (or amounts) contained in an appraisal report for a specific
property. The appraisal report is generally prepared by a professional appraiser who looks at
the property's features including size, type of construction, location, condition, and recent sales
of comparable property in the vicinity. The appraised value is an attempt to determine the
property's current market value. The appraisal report for real estate will usually report the
appraised value of the land separate from the appraised value of the structures. An accountant
might use the relationship of these appraised values to allocate the cost of real estate into the
cost of the land and the cost of the buildings.

Example of Appraised Value

Appraised values are useful because a company's balance sheet will report its land and
buildings at the cost when they were acquired and will report the accumulated depreciation of
the buildings. (Land is not depreciated.) Therefore, if the company wants to refinance its real
estate, a current appraisal will usually be required.

Why isn't the direct write off method of uncollectible

accounts receivable the preferred method?
Definition of Direct Write Off Method

Under the direct write off method of accounting for credit losses pertaining to accounts
receivable, no bad debts expense is reported on the income statement until an account
receivable is actually removed from the company's receivables.

Under the direct write off method there is no contra asset account such as Allowance for
Doubtful Accounts. This means that the balance sheet is reporting the full amount of accounts
receivable and therefore implying that the full amount will be converted to cash.

Reason Why the Direct Write Off Method is Not Preferred

The accounting profession does not prefer the direct method for the following reasons:
The accounts receivable are more likely to be reported on the balance sheet at an amount that
is greater than the amount that will actually be collected

The bad debts expense resulting from having sold goods on credit will appear on the income
statement only after the bad account is identified and removed from the company's accounts
receivable. Hence, the bad debts expense is reported much later than would be the case under
the allowance method.