A unit of account is a standardized unit which can be used to describe the value of something. Currencies are commonly used as a unit of account because they have a number of traits which make them suitable for this purpose, but objects can also be used, as for example pieces of gold or silver. Historically, people often used tradeable goods like sacks of flour or livestock as units of account.
When something is used as a unit of account, it needs to have several properties. The first is the ability to standardize and easily understand it. With currencies, for example, standard amounts can be given and widely understood; $10 United States Dollars (USD), for example, is a standard amount which leaves no room for confusion, unlike a number like “10 cows,” which could mean “10 large cows,” “10 dairy cows,” and so forth.
Another important trait is stability. In this sense, currencies are actually less than ideally suited because they can be quite volatile, depending on the market. This is why some currencies tend to be used more than others as units of account. The United States Dollar and European Euro, for example, are widely regarded as reasonably stable. However, many nations prefer to use their own currency as a unit of account.
Finally, a unit of account must also be something which can be easily broken up into components of equal value without losing value. In the example of $10 USD above, if it is broken up into 10 one dollar increments, they still have the same value and are comparable to each other. One dollar bill, in other words, is like any other dollar bill, and ten dollar bills are equivalent in value to a $10 bill. On the other hand, something like a work of art does not have this trait. Paintings cannot be chopped up into pieces of equivalent value. Likewise, a large diamond loses value when it is broken apart. By contrast, durable goods like flour share the same value whether one is looking at 10 sacks of flour or 100 sacks of flour.
The unit of account is used in a wide variety of transactions. Loans, debt obligations, credits, and costs for goods sold are usually expressed in units of account. In cases where people wish to keep track of their financial activities, they also use units of account in a practice known as accounting. It is also possible to convert between different systems, as seen when a bank in Germany makes a wire transfer to a bank in the United States where the party in Germany sends Euros and the party in the United States receives dollars.
Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a SmartCapitalMind researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.