Wednesday, 21 October 2009

Accountants transform an illusion into a GAAP

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

Money’s third function is that it is the unit of account in the economy. It is a monetary standard of measure of the real value of economic items to facilitate exchange without barter in order to overcome the double coincidence of wants problem. Inflation destroys the real value of money and deflation increases the real value of money. Money has never been perfectly stable in real value over an extended period of time. However, money illusion makes people believe that money maintains its real value over the short to medium term. Money is the only standard unit of measure that is not a fundamentally stable or fixed unit of value. All other standards of measure are perfectly stable units.

Accountants transformed money illusion into an official generally accepted accounting principle with their stable measuring unit assumption, also called the Measuring Unit Principle.

The unit of measure in accounting shall be the base money unit of the most relevant currency. This principle also assumes the unit of measure is stable; that is, changes in its general purchasing power are not considered sufficiently important to require adjustments to the basic financial reports.

Kindest regards,

Nicolaas Smith