What is the monetary unit assumption and more other terms that are briefly explained PDF

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Basic Accounting Principles that are briefly explained and give some examples the terms are What is the monetary unit assumption? What is the difference between assessed value and appraised value? and Why isn't the direct write off method of uncollectible accounts receivable the preferred method?...

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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....