What Is a Monetary Item?
A monetary item is an asset or liability carrying a value in dollars that will not change in the future. These items have a fixed numerical value in dollars, and a dollar is always worth a dollar. The numbers do not change even though the purchasing power of a dollar can potentially change.
- Monetary items are assets or liabilities that have a fixed value, such as cash or debt.
- These items, such as $25,000 in cash, have a fixed value although inflation and other macroeconomic factors might affect purchasing power.
- Nonmonetary items cannot be converted to cash quickly, such as property, equipment, and inventory.
- Monetary assets are never restated on the financial statements.
Understanding Monetary Items
The most common monetary item is simply cash, whether a debt owed by a company (liability), a debt owed to it (asset), or a pile of cash in its account (asset). $100,000 of cash today will still be worth $100,000 a year later, even though the buying power would have decreased slightly due to inflation. If a company owes $40,000 to a supplier for goods delivered, that line item is recorded as $40,000 even though, when the company pays the bill three months later, the cost of those same goods has increased $300 because of inflation.
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. Types of monetary items can also include receivables and lease and debt investments.
The key with monetary items is that their dollar value does not fluctuate. Again, the purchasing power can change, such as with inflation. Monetary items don’t gain value in the market and cannot go obsolete. This means that if you put $100,000 in a bank account that in a year’s time there would still be $100,000 in that account.
As well, that means the value of monetary assets are never restated. Accounting principles require certain assets and liabilities to be restated as the value changes. Nonmonetary assets may be restated, however, such as investments held for trading, which can fluctuate over time.
Monetary Item vs. Nonmonetary Item
A nonmonetary item is subject to a change in value and cannot be quickly converted to cash. A factory or piece of equipment is a nonmonetary item because its value generally declines over time with usage.
Inventory is also a nonmonetary asset because it can become obsolete. 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. These items, such as equipment, can be rendered obsolete by technology.