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What are Non-monetary Assets and Liabilities in accounting?

Non-monetary assets are assets that have value but cannot be converted into cash or money.

Non monetary assets

What are Non-Monetary Assets?

Non-monetary assets are the assets a company has whose exact monetary value cannot be determined precisely. The value of these assets changes frequently depending on the changes in economic and market conditions. These assets appear on the balance sheet under tangible and non-current assets. A company may need to change its non-monetary assets as these assets wear out or become obsolete. Examples of non-monetary assets would be goodwill, copyrights, inventory, and plant, property and equipment (PP&E). Once these assets are sold, the amount obtained as sales can vary since there is no standard rate at which the assets can be converted into cash. In contrast, monetary assets can easily be converted to cash or cash equivalents for a fixed or precisely determined amount of money.

Understanding of Non-monetary assets and their characteristics

Non-monetary assets are distinct from monetary assets as they cannot be easily converted to cash or cash equivalents such as cash on hand, bank deposits, investment accounts, accounts receivable, notes receivable, etc.They do not have a fixed rate at which the company can convert them into cash. They include both tangible and intangible assets. Tangible assets have a physical form in nature and are the most basic assets listed on a company’s balance sheet. Examples of tangible assets are Plant, Property, and Equipment (PP&E). Intangible assets do not have a physical form in nature and companies can acquire or create these assets. A few examples of intangible assets would be copyrights, trademarks, goodwill, design patents, etc. 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 change in demand and supply.

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.

The following are the differences between monetary and non-monetary assets:

  • Liquidity:

Liquidity refers to how easily an asset can be converted into cash or cash equivalents. Monetary assets are liquid as they can easily be converted to cash. Monetary assets are sometimes also referred to as current assets. It cannot be easily converted into cash or cash equivalents. They are illiquid as they do not have a fixed monetary value and thus cannot be easily converted to cash.

  • Cash Conversion:

Assets are quantified differently between monetary and non-monetary. The standard measure of the assets is the dollar value that is recorded on 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. On the other hand, it cannot be converted into cash easily because they are subjective in their valuation. These changes occur due to changes in demand and supply, inflation and deflation, market competition, etc.

  • Factors that affect cash value:

The actual cash value of the monetary assets remains the same in absolute value and only changes in relative terms due to changes in the time value of money. On the contrary, the cash value of this assets is not fixed, and it changes in response to market factors such as government regulations, technological factors, demand and supply, etc.

Examples of Non Monetary Assets

Here are a few examples

  1. Intellectual property: This includes patents, trademarks, copyrights, and trade secrets. These assets provide a company with legal protection and can be very valuable to the company, especially in the technology and entertainment industries.
  2. Goodwill: This is the value of a company's reputation and customer loyalty. It can be an important asset for a company and can help it to attract new customers and retain existing ones.
  3. Human capital: This refers to the knowledge, skills, and abilities of a company's employees. It is an important asset for companies because it enables them to innovate and compete effectively in the marketplace.
  4. Brand: A strong brand can be a valuable asset as it can be used to attract and retain customers, build loyalty, and increase brand awareness.
  5. Network: A company's network of suppliers, customers and partners can also be considered as an asset. This network can be leveraged to gain access to new markets, customers, and resources.
  6. Licenses and Permits: A company may have licenses and permits that are required to operate certain activities, such as mining, fishing or broadcasting. These licenses and permits can be considered as non-monetary assets as they provide access to unique resources or opportunities.

These are just a few examples of non-monetary assets that companies can have. While non-monetary assets are not as tangible as monetary assets, they can be just as important to a company's success.