Every Organisation owns various kinds of assets in its Financial Statements. Assets are an important resource to run a business effectively. The basic fundamental to differentiate between any two assets is their fixed and fluctuating value.
Business analysis by outsider Investors is done based upon the number of Monetary Assets Present in the Balance Sheet. The terms elaborated below play a vital role in financial analysis.
Key Takeaways
- Monetary assets include cash and financial instruments that can be converted to a fixed amount of cash, such as stocks, bonds, and receivables.
- Nonmonetary assets are physical items or intangible resources, such as real estate, equipment, and patents.
- The value of monetary assets remains stable, whereas nonmonetary assets can fluctuate due to market changes, depreciation, or appreciation.
Monetary vs Nonmonetary Assets
Monetary assets are assets that have a fixed, measurable value in a specific currency, and can be readily converted into cash. Examples include cash, bank deposits and short-term investments. Non-monetary assets are assets that do not have a fixed, measurable value in a specific currency, and cannot be readily converted into cash. Examples include property, plant and equipment.
The term Monetary Assets refers to the assets or liabilities that have fixed currency value for easy liquidity. The fixed numerical value of Monetary Assets does not change with the purchasing power of the currency.
These assets are never restated on the Balance Sheet. It includes Cash-in-Hand, Account Receivable, and more other liquid forms of assets in the company.
The term Nonmonetary Assets refers to assets or liabilities that do not carry any fixed currency exchange value. These assets are restated every year to calculate their fluctuating value.
These assets may or may not be tangible. They are not easily convertible into cash. The Non-Current head in the financial statements carries the Nonmonetary Assets.
Comparison Table
| Parameters of Comparison | Monetary Assets | Nonmonetary Assets |
|---|---|---|
| Liquidity | Relatively more liquidity in the case of Monetary Assets. | Relatively less liquidity in the case of Nonmonetary Assets. |
| Factor Affecting | Monetary Assets are affected in terms of cash value by changing the time value of money. | Nonmonetary Assets are affected by various market factors. |
| Purpose | It relates to the day-to-day funding of a business. | On the other hand, It relates to provision for upcoming revenue. |
| Tax Implication | In the case of disposal, the gain is taxable as business profit. | In the case of disposal, the gain is taxable as Capital gain. |
| Examples | Cash, Overdraft, Bank Balance, Debtors. | Fixed Assets and investment etc. |
What are Monetary Assets?
Monetary assets are those short-term assets under financial statements that are easily convertible into cash and cash equivalents.
These assets are not subject to appreciation or depreciation therefore their value remains the same. It helps fulfill the working capital needs of the company and meet daily expenses.
These assets carry an obligation to realize some specified value at a particular time. For smooth conduct of business, the production cycle should not be a break and Monetary assets help to maintain that production or trading cycle in a business.
It also performs the role of assurance for the creditors that their hard-earned amount is safe and secured.
Provision for risk like a financial crisis can be created with the help of Monetary Assets. It creates a wealthy image of an organization. In terms of quick conversion and ready market, they fulfill the need for real cash in the business.
Monetary assets do not gain any additional value over the period. Trade receivables, Lease Investments, and Bank deposits are a few types of Monetary Assets.
Mostly tangible assets that are visible and physical existence are considered Monetary Assets. In a few instances Inventory is also considered as Monetary assets until converted into finished goods.
What are Nonmonetary Assets?
The term Nonmonetary Assets are illiquid assets that are not easily converted into cash or cash equivalents also their value is subject to appreciation or depreciation.
Intangible assets like patents, goodwill, etc. are part of this group. These assets carry risks of low liquidity since they include fixed assets and liability. They are more subjective to their value.
Inventories when converted into final goods are termed as Nonmonetary assets. The actual value of Nonmonetary assets are fluctuating as their actual value is affected by certain economic factors.
The only disadvantage of intangible assets under the heading of Nonmonetary assets is that their value is calculated after multiple steps of the valuation process.
Nonmonetary assets are absent with the right to receive obligation. The company’s business premises and the final products are Nonmonetray objects that generate revenue for the business but their value is undefined.
General economic crisis impacts the value of Nonmonetary Assets. They appear in the financial statement under the heading of Non-current assets.
For Example- The real estate property held in the name of the business cannot be sold immediately also the value is also not accurate every but it may generate revenue in the financial crunch of the business in the future.
Main Differences Between Monetary and Nonmonetary Assets
- Reporting in Foreign Exchange: In Monetary Assets, the closing exchanges rate is considered as per the signing date of the balance sheet and In Nonmonetary Assets, the closing exchanges rate is considered as per the Transactional cost or Historical cost.
- Tangibility: Monetary Assets are tangible on the contrary the Nonmonetary Assets are intangible.
- Relevance: Monetary Assets are directly related to the Working capital of the company and Nonmonetary Assets are directly related to the Fixed capital of the company.
- Period of accessibility: Monetary Assets are accessible in a short duration of time conversely Nonmonetary Assets are accessible in a long duration of time
- Compensation: Monetary Assets carry no compensation for changes in the money value whereas Nonmonetary Assets carry compensation for changes in the money value.
- https://www.journals.uchicago.edu/doi/abs/10.1086/261339
- https://pubsonline.informs.org/doi/abs/10.1287/mksc.16.2.129
I’ve put so much effort writing this blog post to provide value to you. It’ll be very helpful for me, if you consider sharing it on social media or with your friends/family. SHARING IS ♥️
The distinction between Monetary and Nonmonetary Assets was very well analyzed, an interesting contrast of assets that few people truly comprehend.
I disagree with you, Carlie. I think it’s a bit much for the average person to understand.
I think this article was quite insightful and well worth the deep dive.
Great post, very informative on a complex subject that not many people are aware of.
An interesting article, but I question how practical it is to the average reader.
It’s interesting to see a deeper analysis of financial statements and assets, great job in explaining it in an accessible way.
This makes an unnecessarily complex subject even harder to understand.
This is an excellent breakdown of a complex topic. A very detailed analysis and explanation.
It’s a bit too complex. It should be simplified for the general public to understand.
I agree with Russell, this is an enlightening article that helped me understand these concepts better.