Economic activity is measured in dollars, and only transactions that can be expressed in dollars are recorded. Because of this basic accounting principle, it is assumed that the dollar’s purchasing power has not changed over time. As a result accountants ignore the effect of inflation on recorded amounts. For example, dollars from a 1960 transaction are combined (or shown with) dollars from a 2006 transaction. Since accounting is concerned with financial information it must adopt a unit of measurement which can only logically by the basic monetary unit of the economy concerned. In China, of course, this is the RMB.

• Accounting records are maintained in terms of monetary units, that is, the currency unit of the country in which the entity resides

• The monetary unit is static in terms of purchasing power.