“Monetary assets and liabilities”
The concept of nonmonetary items is important to alternative accounting methods such as constant dollar accounting and current cost accounting. Nonmonetary assets are items a company holds for which it is not possible to precisely determine a dollar value. These are assets whose dollar value may fluctuate and that changes substantially over time, such as equipment or property.
Difference between monetary and non-monetary assets:
Examples of monetary assets include cash, accounts receivable, notes receivable, and investments. Examples of monetary liabilities include accounts payable, notes payable, sales taxes payable, and various accrued expenses. Assets and liabilities that are fixed in dollar amounts and are thus not affected by inflation. Examples of monetary items include cash, accounts receivable, accounts payable, bonds, and short-term loans.
Definitions and explanations
In periods of high inflation, holding monetary liabilities increases a firm’s purchasing power, while holding monetary assets decreases it. The concept of monetary items is important to alternative accounting methods such as constant dollar accounting and current cost accounting. Monetary items are those assets and liabilities appearing on the balance sheet that are cash or readily converted into cash. Generally, current assets and current liabilities are also monetary items.
Generally speaking, nonmonetary assets are assets that appear on the balance sheet but are not readily or easily convertible into cash or cash equivalents. Financial assets are resources that can quickly be converted into cash equivalence. They include assets likes receivable notes, bank deposits, bonds, stocks, trade receivable, and cash reserves.
It is possible to determine the dollar value of such a liability, but the liability represents a service obligation rather than a financial obligation such as interest payments on a loan. In accounting, noncash items are financial items such as depreciation and amortization that are included in the business’ net income, but which do not affect the cash flow. While they may not impact the net cash flow of the business, these expenses impact the bottom-line of the income statement and result in lower reported earnings. Inventory is also a nonmonetary asset because it can become obsolete.
However, nonmonetary assets and liabilities that cannot be readily converted to cash are also included in a company’s balance sheet. Common examples of nonmonetary assets are the real estate a company owns where its offices or a manufacturing facility are located, and intangibles such as proprietary technology or other intellectual property. The financial accounting term nonmonetary item refers to those assets and liabilities whose price in terms of dollars may change over time. Examples of nonmonetary assets include inventory, raw materials, property, plant and equipment.
Other nonmonetary items include intangible assets, long-term investments and certain long-term liabilities such as pension obligations, all of which could either rise or fall in value from period to period. The value of nonmonetary assets can fluctuate based on supply and demand.
Monetary assets vs non-monetary assets – tabular comparison
- Generally, nonmonetary assets include fixed assets such as property, plant and equipment as well as intangible items such as goodwill.
- The dollar is a unit of measure used to quantify the value of assets and liabilities appearing in a company’s financial statements.
Examples of nonmonetary liabilities include warranties payable and deferred income tax credits. Because the value is fixed at $40,000, this account payable is considered a monetary item. Bank deposits, short-term fixed income instruments and accounts receivable are monetary assets since they all can be readily converted into a fixed amount of money within a short time span. Monetary items are booked as current assets or liabilities on the balance sheet.
These items are undeniably assets, but their current value is not always apparent as it changes over time in accord with economic and market conditions and forces. For example, marketplace competition changes the dollar value of a company’s inventory as the company adjusts its market price in response to price competition from other companies or to the demand for the company’s products. General economic forces such as inflation or deflation also impact the value of nonmonetary assets such as inventory or manufacturing facilities.
The purest form of financial assets is cash and cash equivalents—checking accounts, savings accounts, and money market accounts. Liquid accounts are easily turned into funds for paying bills and covering financial emergencies or pressing demands.
Types of monetary items can also include receivables and lease and debt investments. Typical nonmonetary assets of a company include both intangible assets such as copyrights, design patents and goodwill, and tangible assets such as property, plant and equipment assets and inventory. The financial accounting term monetary items refers to those assets and liabilities whose value is measured and stated in cash.
In addition to nonmonetary assets, companies also commonly have nonmonetary liabilities. Nonmonetary liabilities include obligations that cannot be met in the form of cash payments, such as warranty service on goods a company sells.
On the other hand, real assets are the physical resources that are value-generating and are owned by the business entity. Some of the examples of real assets are machinery, commodities, inventories, buildings, land, and real estate. In addition to stocks and receivables, the above definition comprises financial derivatives, bonds, money market or other account holdings, and equity stakes. Many of these financial assets do not have a set monetary value until they are converted into cash, especially in the case of stocks where their value and price fluctuate.
The dollar is a unit of measure used to quantify the value of assets and liabilities appearing in a company’s financial statements. Nonmonetary items are those assets and liabilities appearing on the balance sheet that are not cash, or cannot be readily converted into cash. Generally, nonmonetary assets include fixed assets such as property, plant and equipment as well as intangible items such as goodwill. Dollar values are the accepted measure for quantifying a company’s assets and liabilities as they are presented in a company’s financial statements.
What are monetary and non monetary assets?
A nonmonetary asset is an asset whose value can change over time in response to economic conditions. Examples of nonmonetary assets are buildings, equipment, inventory, and patents. The amount that can be obtained for these assets can vary, since there is no fixed rate at which they convert into cash.
These items, such as equipment, can be rendered obsolete by technology. Real estate and fine antiques are examples of illiquid financial assets.