Difference Between Monetary and Nonmonetary Assets
Nonmonetary assets and monetary assets are distinct. The difference between them lies in the degree of ease with which a cash value can be assigned to them. While monetary assets bear a fixed cash value, nonmonetary assets do not.
What are monetary assets?
- Bank deposits
- Accounts receivable
- Notes receivable
- Highly liquid investments
Monetary assets mean cash and cash equivalents like cash on hand, bank deposits, investment accounts, accounts receivable and notes receivable. All of these assets may be easily converted into a fixed or absolutely ascertainable amount of money.
Thus, monetary assets are those for which it is easy to assign a cash value and which denote a fixed amount to be receivable by a company in the near future.
All monetary assets are generally considered to be current assets and are reported on a company’s balance sheet as such.
Even though monetary assets have a fixed value in absolute terms but their value may change in relative terms. For instance, $40,000 of cash now will still be considered $40,000 of cash one year from now. Because of changes in purchasing power, you may not be able to buy the same units/pieces of a product one year from now that you can buy with $40,000 today.
It must be noted that monetary assets will decline in value in an inflationary environment unless they are invested in interest-bearing or appreciating assets that produce returns that match or surpass the rate of inflation.
Fixed assets, which have a longer time horizon, are not regarded as monetary assets because their values depreciate with time.
What are nonmonetary assets?
- Plant & Machinery
- Patents, trademarks and copyrights
- Equity investments
The assets whose value is difficult to be precisely determined are called nonmonetary assets. They cannot also be easily liquidated.
Nonmonetary assets are those which cannot be readily converted into cash but are included in a company’s balance sheet. Examples are real estate assets, long-term market investments, production or manufacturing facilities, equipment and vehicles, intangibles like goodwill or intellectual property, etc.
Undoubtedly, these are assets but their current value varies over time in response to economic and market conditions.
For example, market competition affects the value of a company’s stock. Competition from other companies and market demand for the products cause the company to make adjustments in its market price. In addition, nonmonetary assets such as inventory or production facilities are also affected by general economic pressures such as inflation or deflation.
Similarly, the value of investments in equity shares fluctuates in response to changes in stock market prices. Furthermore, the value of Plant & Machinery may fall dramatically due to obsolescence following the introduction of new and improved technology, etc.
A company’s nonmonetary assets generally include both tangible and intangible assets. Tangible assets are the most fundamental types of assets recorded on a company’s balance sheet and have a physical presence. Inventory as well as property, plant, and equipment (PP&E) are examples of tangible assets.
Intangible assets, on the other hand, are not physical in nature. Intangible assets can be acquired or created by businesses. Copyright, design patents, trademarks, brand recognition, and goodwill are some examples.
Comparison between monetary and nonmonetary assets
The table given below presents the key differences between monetary and nonmonetary assets:
|Basis||Monetary Assets||Nonmonetary Assets|
|Value||Monetary assets hold a precise value of money. Hence, a fixed amount can be obtained from their conversion.||Nonmonetary assets do not hold a precise value. Since there is no fixed rate at which they can be converted, their value can substantially fluctuate.|
|Factors influencing them||The value of monetary assets remains fixed in absolute terms and can only fluctuate in relative terms due to changes in the time value of money.||The value of nonmonetary assets varies in response to economic and market conditions such as demand/supply forces, government regulations, etc.|
|Usage||A company’s monetary assets might be used to support capital improvements or to cover the day-to-day operating expenses.||A company’s nonmonetary assets will be used to generate income. A business, for example, can use its facilities and equipment to manufacture the products it will sell to its customers.|
|Conversion||Monetary assets can be easily converted into cash or cash equivalents.||Nonmonetary assets are not easily convertible into cash or cash equivalents.|
|Examples||Examples are cash on hand, bank deposits, investment accounts, accounts receivable, etc.||Real estate assets, production or manufacturing facilities, intangibles like goodwill or intellectual property, etc. are some examples.|
|Nature||Current assets (Although inventory is regarded as nonmonetary since its value is subject to changes in market price.)||Intangible assets and non-current assets|
The determining factor
It is not always apparent whether a given asset is monetary or nonmonetary.
In such cases, the determining factor is whether the asset’s value represents an amount that may be converted into a specified amount of cash or cash equivalents in a relatively short period of time.
A monetary asset is one that can readily be converted into cash. For example, liquid assets are assets that can be quickly turned into cash in a short period of time.
But if it cannot be quickly converted into cash or a cash equivalent, it is classified as a nonmonetary asset.
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