Unit Of Account

Publication Date :

08 Jun, 2025

Blog Author :

Edited by :

Reviewed by :

Table of Contents

Unit Of Account Definition

Unit of Account, in finance and economics, refers to the measure or metric used to value goods, services, assets, and income. The prime unit of account function is to act as a standard measure for various items despite the difference in their nature or characteristics.

Money is widely accepted in the global market. Therefore, in most cases, individuals and firms use money as a unit of account. Also, it makes it easier for them to measure two different valued items at par. However, there are certain limitations to using money as a unit of account, given the frequent fluctuations that it witnessed.

Key Takeaways

Unit of Account is the defined measure of the value of goods, services, or transactions. Money is the most popular unit.
In some cases, macroeconomic factors like inflation, recession, and deflation can also affect such units, especially money.
A unit must be a store of value, a medium of exchange, fungible, divisible, and possess some monetary value.
While the store of value is one of the features that a unit of account must acquire, the former still differs from the latter with respect to its purpose and applications.

Unit Of Account Explained

A unit of account is a standard measure to value goods and services. This term is relevant in both accounting and economics. The unit of account in accounting refers to the defined unit to measure and record financial transactions. When there is a similar denomination, it becomes easier to value items in the financial statements accurately. It acts as a crucial element of the financial reporting procedure. For example, using a million or billion dollars as a unit helps companies provide an approximate income earned in a specific financial year.

The origin of the unit of account dates back several centuries. In the early 14th and 15th centuries, coins (like gold, silver, or other metals) were used as a unit. Likewise, during the 20th century, fiat currency was accepted as a major unit of account. As per the United Nations Commission on International Trade Law (1982), limitation of liability is also considered a unit of account, given the provisions of the same as a convention in international trade involving global and regional participants.

However, money had certain limitations in acting as a standard unit due to fluctuations in its value. Inflation causes a rise in the unit of account costs of money and hence, it can also lose its credibility in the long run. Since money is influenced by economic factors like inflation, deflation, and others, its inconsistencies create confusion and might affect accounting entries and results.

Although inflation influences the unit of account cost, it can still act as a standardized measure. The volatility and the market forces like demand and supply affect the unit, but the intensity of the impact depends on the type and nature of the unit. For example, the US dollar is a globally accepted unit, and hence, it is less affected by macroeconomic factors compared to other units. Moreover, nowadays, even cryptocurrencies are seen as a viable source of a unit of account.

Conditions

For a unit to become a unit of account, certain criteria must be fulfilled. Let us have a look at them below:

Act as a store of value, which ensures the unit chosen has the ability to preserve its value across time.
Become a medium of exchange that facilitates the usage of such units in exchange for goods and services bought within an economy.
Should be easily fungible and divisible. Being divisible makes the unit capable of getting subdivided into even smaller units to carry out transactions, while fungibility ensures its capability to be interchangeable. This means one unit of account can be exchanged for another used in some other part of the world.
Lastly, it must contain a specific monetary value.

Examples

Let us look at the examples of a unit of account to understand the concept in a better way:

Example #1

Suppose Koss Ltd is preparing its financial statements for the year 2022-23. In the previous year, firms had recorded the following transactions in their books. They are listed below:

Operating income - $30,000,000,000
Financial income - $55,000,000,000
Assets - $100,000,000,000
Liabilities - $15,000,000,000

From the following items, Koss Ltd tried to keep the same unit of account rather than various others. For example, in this case, as the dollar amount is huge, the firm will keep a million dollars as a standardized unit.

So, the revised financial statement with the unit of account is as follows:

Operating income - $30,000 million
Financial income - $55,000 million
Assets - $100,000 million
Liabilities - $15,000 million

Example #2

In January 2024, Próspera recognized Bitcoin (BTC) as a unit of account besides the widely used Honduran lempira and the US dollars. It is a special economic zone in Hondura's Roatan, which ruled that BTC would further be used to measure the market value of the goods, services, and transactions, thereby giving individuals the liberty to use units they are comfortable with.

Unit Of Account vs Store Of Value

Although the store of value is an important feature of the unit of account and hence forms part of the latter, they still differ in various aspects. So, let us look at their differences:

Basis	Unit Of Account	Unit Of Account
1. Meaning	It refers to the standardized unit measuring goods, services, assets, and income.	Store of value is the value stored in assets, currency, and commodities.
2. Purpose	To maintain a similar measure for different valued items.	To determine the items that store monetary value within themselves.
3. Applications	To maintain a similar measure for different valued items.	To determine the items that store monetary value within themselves.
4. Applications	Finance, Accounting, and Economics.	The concept has a major significance in economics.
5. Examples	US dollars are the most common unit in financial statements.	Currency has the maximum item that acts as a store of value.