What are Non-Monetary Assets?
Non-monetary assets are assets whose value frequently changes in response to changes in economic and market conditions. The assets appear on the balance sheet under intangible and non-current assets. Common examples of non-monetary assets include goodwill, copyrights, inventory, and plant, property and equipment (PP&E).
No established market exists for non-financial assets, and asset owners must find potential buyers who are interested in acquiring the assets. Once an asset is sold, the amount obtained as sales proceeds can vary since there is no standard rate at which the assets can be converted into cash.
- Non-monetary assets are assets whose value changes frequently in response to changes in economic and market conditions.
- The assets are recorded on the balance sheet and may include intangible assets and non-current assets that are illiquid in nature.
- They are not easily converted into cash or cash equivalents and are used to generate future revenues for the company.
Characteristics of Non-Monetary Assets
Non-monetary assets are not readily converted into a fixed amount of money in the short term. They include property, plant, and equipment (PP&E), goodwill, patents, and copyrights.
On the other hand, monetary assets are assets that can be easily converted into a fixed amount of money in the immediate short term and may include bank deposits, accounts receivable, and notes receivable.
The main difference between non-monetary and monetary assets is whether the value of the asset can be converted into cash or cash equivalents within a short period.
Non-monetary assets are illiquid, and their value fluctuates and changes over time. The value of the asset may change due to either inflation, depreciation, or market forces of supply and demand. For example, the value of factory equipment loses value gradually over its useful life due to depreciation.
Non-Monetary Assets vs. Non-Monetary Liabilities
Non-monetary liabilities are obligations that are not payable in cash and are recorded in the balance sheet under the liabilities section. An example of a non-current liability is the warranty service on a product.
While it is possible to assign a value to the warranty service based on past product defect information, the obligation is not payable in currency notes. The warranty service represents a service obligation, and it differs from financial obligations, such as loan interests, which are quantifiable.
Non-Monetary Assets vs. Monetary Assets
The following are the key differences between monetary and non-monetary assets:
Liquidity refers to the ability to dispose of assets quickly and with minimal loss of value. Monetary assets are liquid, and they are easily converted into cash or cash equivalents in the immediate short term. Monetary assets are sometimes referred to as current assets because they can be converted into cash in the course of normal business activity.
Non-monetary assets are assets that are not easily converted into cash unless there is a drastic price reduction. It can occur when a competitor adjusts the selling price of its products downwards or due to a lack of a market where the asset is regularly traded. Non-monetary assets are considered illiquid because they are not easily converted into cash.
2. Cash conversion
Another difference between monetary and non-monetary assets is how the assets are quantified. The standard measure of the assets is the dollar value that is recorded in the company’s balance sheet. Monetary assets are easily converted to a dollar value since they can be quantified into a fixed or determinable dollar amount.
Non-monetary assets, on the other hand, are not easily converted into cash or cash equivalents because they are subjective in their valuations. The value of non-monetary assets is subject to change over time due to market competition, economic forces, such as inflation and deflation, as well as forces of demand and supply.
3. Factors that affect the cash value
The cash value of monetary assets remains the same in absolute value and only changes in relative terms due to changes in the time value of money. The cash value of monetary assets remains constant and fixed and is not affected by market forces.
In contrast, the cash value of non-monetary assets is not fixed, and it changes in response to changes in market factors, such as government regulations, technological factors, and forces of demand and supply.
4. Relevance in the business
Monetary assets, such as cash in hand and bank deposits, are used to fund working capital requirements since they are liquid in nature. They can be easily converted into cash and used to fund day-to-day operations.
On the other hand, non-monetary assets, such as plant and factory equipment, are used to generate future revenues for the business. For example, a real estate property cannot be readily converted to cash in the immediate short term, but it will generate rental income for the business.
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