Final answer:
The principle referred to is the historical cost principle, which mandates transactions to be recorded at their original cost. It aligns with the concept of Purchasing Power Parity (PPP), wherein over time, exchange rates adjust to ensure uniform purchasing power across countries. Money serves as the unit of account, making it easier to measure and compare values.
Step-by-step explanation:
Under the historical cost principle, purchase transactions are recorded in the total amount of currency paid for the purchases at the time the purchases occur. This accounting principle dictates that companies account for and report many assets and liabilities on the basis of their actual, or historical, cost. This approach to recording transactions provides a clear and consistent valuation method and offers a stable basis for analyzing financial statements.
When considering the purchasing power of a currency, the concept of Purchasing Power Parity (PPP) becomes relevant. PPP suggests that over the long term, exchange rates should adjust to equalize the price of a basket of goods in different countries. This means that the same amount of money should be able to purchase the same quantity of goods in any country, assuming no transportation costs or trade barriers. If goods are cheaper in one country due to exchange rates, businesses may capitalize on this by purchasing goods there and selling them in countries where prices are higher, thus leveling the playing field over time.
Furthermore, money's role as a unit of account plays a crucial part in facilitating these trade-offs, as it acts as a common denominator for measuring and comparing values, such as determining whether the cost of purchasing goods internationally represents a favorable scenario for a business.