MaRS Library Accounting principle: Stable dollar assumption
To meaningfully record any measurement for future comparison, one must employ a consistent unit of measure. A familiar example would be height which can be measured in either centimetres or inches and then tracked as time goes by. But in order for those measurements to convey meaning, the definition of what is the length of the centimetre or inch must remain the same over time. It cannot vary or information will be lost and confusion will arise.
The same rule of constancy applies when recording financial transactions. In Canada, accountants use either the Canadian dollar or the U.S. dollar (but not interchangeably) to evaluate and express financial performance.
The stable dollar assumption, then, is the underlying accounting principle that the definition of the dollar will remain constant across fiscal periods.
The inflation rate is assumed to be zero. In this way, one can make meaningful comparisons of accounts from entries posted at different points of time.
Wondering why monetary units are used to express every account?
The benefit gained by using monetary (in our case, dollar) figures to express all types of business transactions is that users can instantly sense the financial significance of the event. For example, a financial statement that reports“vehicles purchased: $60,000” conveys more information than one that reports“number of vehicles purchased: three.”
Markle, K. (2004, August). Introduction to Accounting. Presentation delivered at Schulich School of Business, York University, Toronto, Canada.
Pratt, Jamie. (2003). Financial Accounting in an Economic Context. New York: John Wiley & Sons. pp. 76, 77, 766.
- Canada’s four business structures: Sole proprietorship, partnership, corporation and cooperative.
- Reading a financial statement: Cash flow statement, accountant’s report, and notes to the financial statements.
- Financial statements: The four components.
- Financial statements: Balance sheet and income, retained earnings and cash flow statements.
- Fiscal period assumption.