Definition
The financial accounting term monetary items refers to those assets and liabilities whose value is measured and stated in cash. Examples of monetary assets include cash, accounts receivable, notes receivable, and investments. Examples of monetary liabilities include accounts payable, notes payable, sales taxes payable, and various accrued expenses.
Explanation
The dollar is a unit of measure used to quantify the value of assets and liabilities appearing in a company's financial statements. Monetary items are those assets and liabilities appearing on the balance sheet that are cash or readily converted into cash. Generally, current assets and current liabilities are also monetary items.
The important characteristics of monetary items are twofold:
Inflation: while inflation may erode the purchasing power of a monetary asset such as cash, it does not change its numerical value. For example, if a company didn't touch a bank account with a balance of $10,000,000 in cash, it would still have $10,000,000 at year's end, even if double digit inflation were plaguing the economy.
Restatements: while accounting principles may require the value of certain assets and liabilities to be restated as they change, the value of monetary items is never restated. For example, companies are required to adjust the value of investments held for trading purposes as the market price of those securities change over time.
The concept of monetary items is important to alternative accounting methods such as constant dollar accounting and current cost accounting. For example, constant dollar accounting calls for the conversion and reporting of historical financial information in current dollars, while current cost accounting refers to an approach that values assets and liabilities at their fair market value rather than historical cost.
In practice, current costs are typically determined using a price index that's specific to the book value of the asset, while the conversion method uses a general measure of inflation such as the Consumer Price Index published by the Bureau of Labor Statistics.
Related Terms
The financial accounting term Historical Cost Principle refers to a valuation technique used in the preparation of financial statements. The Historical Cost Principle states the value of an asset or liability is recorded on the balance sheet at its cost at the time of acquisition.
Moneyzine EditorJanuary 19th, 2024
The financial accounting term constant dollar accounting refers to the conversion and reporting of historical financial information in current dollars. The constant dollar accounting method requires the conversion of certain historical assets and liabilities to current dollars using a generally accepted measure of inflation such as the Consumer Price Index.Moneyzine EditorNovember 6th, 2024
The financial accounting term current cost accounting refers to an approach that values assets at their fair market value rather than historical cost. In practice, current costs can be determined in a number of ways, including applying a specific price index to the book value of the asset.Moneyzine EditorJanuary 12th, 2024- The financial accounting term nonmonetary item refers to those assets and liabilities whose price in terms of dollars may change over time. Examples of nonmonetary assets include inventory, raw materials, property, plant and equipment. Examples of nonmonetary liabilities include warranties payable and deferred income tax credits.Moneyzine EditorSeptember 20th, 2023
