There are different types of assets owned by any business organization or company. Assets are those resources that are necessary for any company to function effectively. In the financial statements, there are different types of assets mentioned and out of these, monetary and non-monetary assets are. Despite having some basic differences between the two regarding their liquidity and illiquidity, these assets are very much necessary for the firm or the organization to succeed in the long run. Both play a crucial role in leading to the growth and development of the company or the organization.
Monetary Assets Vs Non-Monetary Assets
The key difference between monetary and non-monetary assets lies in the fact that monetary assets are the assets that are present in the company at present. On the other hand, non-monetary assets are those that are fixed assets of any organization. There is a defined value of money in terms of monetary assets whereas, for non-monetary assets, there is no fixed value of the money involved. The increase or the decrease in the financial condition of the economy affects the non-monetary assets since they are stored and fixed. Hence, if inflation occurs in the economy, it directly affects the non-monetary assets. However, the monetary assets are not affected by either inflation or deflation.
Difference Between Monetary Assets and Non-Monetary Assets in Tabular Form
|Parameters of Comparison||Monetary Assets||Non-Monetary Assets|
|Meaning||Monetary assets are those assets that can be easily converted into a fixed amount of money.||Non-monetary assets are those assets that cannot be easily converted into money.|
|Exchange rate||They have a fixed numerical unit of the exchange rates.||They do not have a pre-determined or fixed numerical value of the exchange rate.|
|Relevance||They are relevant in day to day functions. Monetary assets are generally utilized for funding working capital requirements.||Since they are not liquid, hence their relevance lies in the fact that they are mostly utilized to produce revenue for the business.|
|Tangibility||It is tangible.||It is intangible.|
|Motive||It relates to the daily funding undergone by any corporation.||Since they are fixed in nature, hence they relate to the provision for future revenue|
|Factors impacting the cash value||Money's cash value is stable and constant. Their absolute worth remains constant and can only fluctuate proportionally to vary in the temporal amount of currency.||Non-monetary assets' cash values are not constant and fluctuate in reaction to a wide variety of business conditions such as economic factors, performance dimensions, related legislation, and so on.|
|Compensation||Changes in the value of money are not compensated for.||Changes in the value of money are compensated for.|
|Foreign exchange||Foreign exchange financial assets are recorded at the financial statement date's final rate of exchange.||Even on the date of the financial statements, foreign exchange non-monetary assets are mostly recorded at their standard cost.|
|Examples||Monetary assets include cash and cash equivalents, receivable accounts, bonds payables, and inventories.||Non-monetary assets include trademarks, licenses, copyrights, capital, machinery and technology.|
What are Monetary Assets?
Monetary assets are relatively brief assets that are easily convertible into cash and marketable securities on accounting records. Since these assets are not vulnerable to inflation or deflation, their value stays unchanged. It aids in meeting the company's working capital requirements as well as everyday costs. In a nutshell, they are stagnant. Their currency value, however, may fluctuate in response to changes in the pricing of products and services generally. A monetary asset cannot become outmoded or earn a greater sale price with time. When there is inflation in an economy, the monetary assets’ value declines until and unless they are invested in interest-bearing assets that would provide a return that either matches or increases the rate of inflation.
These assets have a high level of liquidity; which means the asset can be quickly turned into cash or cash equivalent. A variety of tangible and current assets are categorized as monetary assets. The performance of a business should not be interrupted for the smooth running of a firm, and monetary assets serve to sustain that manufacturing or trade loop in a corporation. It also serves as security to customers that their hard-earned money is secure and protected. Monetary assets do not grow in value during the term. Such assets comprise trade receivables, rental holdings, term deposits and so on.
Characteristics of Monetary Assets
- Liquidity: Monetary assets are liquid. It keeps on changing in real terms. Its face value remains the same with time. It is static and hence its value never changes. They may however decline in absolute value which depends upon the change in purchasing power of individuals or firms.
- Financial statement restatements: They are not liable for an accounting information reversal of their calculated values. Everyone who has worked in finance is aware that the valuations of resources keep on fluctuating. If one owns a house, its value will fluctuate owing to degradation and a variety of other factors. Similarly, the value of the equipment, technology, reputation, and all other resources also fluctuates. As a result, the value of assets is revised in each year's accounting records. A monetary asset, on the other hand, does not have its value restated in the accounting records and therefore as a result, such types of monetary assets do not require periodic restoration of worth or valuation.
- Stability and cash value: monetary asset’s cash value is stable and constant. Their absolute worth remains constant and can only fluctuate proportionally to vary in the temporal amount of currency.
Some Examples of Monetary Assets
The examples of the monetary assets are as follows
- Cash balance: it is very important to keep a balanced account of cash oneself. The cash balance can lead to the present as well as determine the future aspects of any organization.
- Bank deposits: the amount that one deposits or has in a bank is always counted as a monetary asset.
- Cash in Hand: Cash seems to have the current price of the currency note. Cash is considered to be the most liquid resource and is classified as a monetary asset.
- Lease investments: A company's assets in short-term derivative contracts are also monetary assets that can be easily and quickly converted into cash.
- Money Convertibles: Currency convertible bonds, also known as cash equivalents, are financial commodities that can be easily changed into cash or utilized in the industry as revenue. Cash convertible bonds are reports payable or trade and other receivables associated with a particular surface level.
What are Non-Monetary Assets?
Non-monetary assets are that, whose cash worth is not predetermined and can fluctuate dramatically over time. These assets are also more difficult to value. They are more capricious in terms of their worth. Non-monetary assets' values alter or vary considerably, and their cash rate of exchange is constrained. The opportunity to receive responsibility does not have any tangible or intangible assets. The firm's commercial properties and finished products are non-monetary assets that create profits for the company but have no monetary worth. The value of nonmonetary assets is affected by the broader economic recession. They are also sometimes regarded as non-components of financial performance.
The worth of non-monetary assets does not always remain constant. It keeps on fluctuating. Micro and macroeconomic variables impact the amount of such an asset, and its current price evolves. The values of non-monetary assets are intended to be restated regularly in the fiscal report. Let us assume a plant or an industry for instance. The face value of any such corporation is always increasing or decreasing due to the continuous use of machinery present in the company. The daily wear and tear cause the depletion of the value of the company or the organization. As a result, the real value in the financial statements must be restated.
The purchase price of non-monetary assets is not constant, and it fluctuates in reaction to economic indicators such as restrictions imposed, technical considerations, and price and quantity pressures. The only demerit of non-monetary assets is that their value is only determined after going through several steps in their valuation process.
The value of non-monetary assets is not only influenced by just the change in the periodical value of money but also by several other market-oriented variables. Some of them are- First of all, the value of the stock investment opportunities keeps changing with movements in stock market values. Secondly, the value of any plant or machinery may decline due to the continuous use and depletion of the same. This might even require the introduction of new technologies as well as new plants and machinery which may not immediately lead to a change in the value of the money. Thirdly, the value of any property also keeps on fluctuating responding to a variety of other factors like market demand and supply, regulation policies introduced by the government and so on.
Characteristics of Non-Monetary Assets
The major characteristics of non-monetary assets are as follows
- They cannot be converted readily into a fixed amount of money in a short period. This is because non-monetary assets are not liquid and they do not have a permanent value. Their value may change based on the economy’s inflation or deflation as well as the market demand and supply of items.
- The non-monetary asset like any plant or industry which are used for future revenue cannot be readily converted into cash or cash equivalent in the immediate short term but will generate rental income for the business of the corporation.
Examples of Non-Monetary Assets
The examples of non-monetary assets are as follows
- Ventures in the Housing and Factory
- Investments in the Land Supply
- Market ventures
- Real estate property
- Plant and machinery etc.
Main Differences Between Monetary and Non-Monetary Assets In Points
- Monetary assets are tangible. On the other hand, non-monetary assets are not tangible.
- Carrying monetary assets during the period when the economy undergoes inflation will only result in the loss of purchasing power. However, on the other hand, holding non-monetary assets during the inflation period, the price adjusts itself automatically.
- The cash value of monetary assets remains fixed and constant. Their value remains the same in absolute terms and may change only in relative terms with a change in the time value of money. Whereas, the cash value of non-monetary assets is not fixed and changes in response to several market factors such as demand and supply factors, technological factors, government regulations etc.
- In monetary assets, foreign exchange financial assets are recorded at the financial statement date's final rate of exchange. On the other hand, in the case of non-monetary assets, even on the date of the financial statements, foreign exchange non-monetary assets are mostly recorded at their standard cost.
- Monetary assets are relevant in day to day functions. They are generally utilized for funding working capital requirements. On the other hand, since non-monetary assets are not liquid, hence their relevance lies in the fact that they are mostly utilized to produce revenue for the business.
- Monetary assets are often sold at market price, thus there may be no increased tax implications. Any disposition, whether at a greater or lesser price, is normally assessed as a commercial profit or loss. For example, if creditors are resolved for much less than the market price, the difference is recorded as consumer debt and is taxable income from corporate earnings. Non-monetary asset disposition, on the other hand, may lead to higher profitability or deficit. In most cases, both are recognized as financial profits and losses. For example, a benefit on an item purchased at a premium cost after five years is required to pay taxes as a long-term financial asset.
Thus, it is seen that the determinant factor for classifying monetary and non-monetary assets is dependent upon their value. However, the major difference between these two lies in their liquidity and illiquidity. Since, both of them have numerous benefits despite having some subtle differences, monetary and non-monetary assets carry an enormous amount of benefits for carrying out the smooth functioning of the corporation.