Before going into the “monetary assets and non-monetary assets” comparison, let’s recall the definition of asset. Asset is a resource controlled by an entity from which the entity expects to obtain economic benefits in future.
Depending upon the nature of resources, accounting frameworks have classified assets into various types for better presentation and analysis. This classification of monetary assets and non-monetary assets is based on respective realizability of the assets in terms of money. Let’s separately discuss these types of assets.
Assets whose economic benefits will be received in the form of fixed or precisely determinable units of currency are known as monetary assets. For instance, an entity holds finished goods inventory of $20,000. This amount is the cost of inventory and it is not possible to precisely determine the amount for which this inventory will be sold. Therefore, inventory is a non-monetary asset. Let’s move a step forward! Now, the inventory has been sold on credit to a customer for $25,000 and a debit entry is recorded in accounts receivable. What do you think about accounts receivable? Is it a monetary asset? YES! You are right! As we know that accounts receivable of $25,000 will be realized when the customer will pay the same amount and this amount is fixed, so it is classified as monetary asset.
Some common examples of monetary assets are given below:
- Cash and bank balances
- Accounts receivable
- Refundable deposits and advances
- Loans receivables
Assets whose economic benefits will NOT be received in the form of fixed or precisely determinable units of currency are known as non-monetary assets. As these are also assets, so economic benefits are obviously there, but it is not possible to precisely determine the amount of those economic benefits in terms of units of currency that will be obtained on realization of non-monetary assets. For instance, economic benefits of a manufacturing plant will be obtained by selling the goods that it manufactures. The amount for which those goods will be sold cannot be determined. On the other hand, if we want to sell the manufacturing plant and get cash, again we cannot ascertain the amount for which the manufacturing plant will be sold. So, such assets are categorized as non-monetary assets.
Some common examples of non-monetary assets are given below:
Uses of identifying monetary assets and non-monetary assets
Identifying monetary assets helps the users of financial statements to identify liquid assets which can be readily convertible into cash. Such information can then be used to evaluate an entity’s liquidity position by comparing it with its current liabilities. Furthermore, when an entity is involved in cross border businesses, it usually involves transactions in foreign currency. At the reporting date, monetary assets and monetary liabilities in foreign currency are required to be remeasured at the foreign currency exchange rate prevailing at the reporting date. So, this concept is also important for financial reporting involving foreign currency transactions and balances.