Passage 2 Accounting information is expressed primarily in monetary terms. The monetary unit is the prime means of measuring assets. This measure is not surprising given that money is the common denominator in business transactions. In the United States, the monetary unit is the dollar; in Great Britain, the pound sterling; in Japan, the yen. The stable-monetary-unit concept provides an orderly basis for handling account balances to produce the financial statements. Unlike a liter, a foot, and many other measurements, the value of the monetary unit may change over time. Most of us are familiar with inflation. Groceries that cost $50 three years ago may cost $60 today. The value of the dollar changes. In view of the fact that the dollar does not maintain a constant value, how does a business measure the worth of assets and liabilities acquired over a long span of time The business records all assets and liabilities at cost. Each asset and each liability on the balance sheet is the sum of all the individual dollar amounts added over time. For example, if a company bought 100 acres of land in 1975 for $60,000 and another 100 acres of land in 1992 for $300,000, the asset of land on the balance sheet carries a $360,000 balance, and the change in the purchasing power of the dollar is ignored. The stable-monetary-unit concept is the accountant’s basis for ignoring the effect of inflation and no restatements for the changing value of the dollar. Let’s look at the short-comings of this concept. Suppose another company paid $ 600,000 for the same 200 acres of land in 1992. Its land would be the same as the preceding company’s land, but its balance sheet would show a much higher amount for the land. How do we compare the two companies’ balance sheets The comparison based on the stable-monetary-unit concept may not be valid because mixing dollar values at different times is like mixing apples and oranges.

Passage 2By what means does a business measure the worth of assets and liabilities