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Tuesday, 16 February 2010

No fundamental constant

One of the basic principles in accounting is “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 statements.”


Paul H. Walgenbach, Norman E. Dittrich and Ernest I. Hanson, (1973), Financial Accounting, New York: Harcourt Brace Javonovich, Inc. Page 429.

However, non-monetary items are not all fundamentally the same. Non-monetary items are, in fact, subdivided into variable real value non-monetary items and constant real value non-monetary items. The three fundamentally different basic economic items are monetary items, variable items and constant items although it is generally accepted under the HC paradigm that there are only two basic economic items, namely, monetary and non-monetary items.

HC accountants regard all non-monetary items stated at HC, whether they are variable real value non-monetary HC items or constant real value non-monetary HC items to be fundamentally the same, namely, simply non-monetary items when they implement their very destructive stable measuring unit assumption as part of the traditional HCA model during low inflationary periods.

This is the result of money illusion. People make the mistake of thinking that money is stable in real value in a low inflationary environment. Inflation always and everywhere destroys the real value of money over time. It is thus impossible for money to be stable in real value during inflation. On the other hand, inflation has no effect on the real value of non-monetary items over time.
The unit of measure in accounting is the base money unit of the most relevant currency. Money is not stable in real value during inflation.

This means that the monetary unit of measure in accounting is not a stable monetary unit of measure during inflation and deflation. Accountants´ unstable monetary unit of measure or unstable monetary unit of account is the only generally accepted unit of measurement that is not an absolute value. It does not contain a fundamental constant. All other generally accepted units of measurement of time, distance, velocity, mass, momentum, energy, weight, etc are absolute values, e.g. second, minute, hour, metre, yard, litre, kilogram, pound, mile, kilometre, inch, centimetre, gallon, ounce, etc.

Kindest regards,

Nicolaas Smith

Copyright © 2010 Nicolaas J Smith