What it means
Accountants split assets into two groups. Monetary assets are cash and claims to a fixed amount of cash, such as bank deposits and customer invoices.
Non-monetary assets are everything else, including buildings, machinery, vehicles, stock held for sale, prepaid expenses and intangible assets like patents. The split matters most when prices are moving.
A $10,000 receivable stays at $10,000 whatever happens to inflation, but its buying power falls as prices rise. A machine, on the other hand, can often be sold for more as prices rise, so non-monetary assets tend to hold their real value better in inflationary periods.
Non-monetary assets are usually recorded at cost less depreciation (the gradual write-down of an asset over its useful life), though some can be revalued to fair value. This is why a building bought years ago may appear on the balance sheet well below what it could sell for today.
Foreign currency adds another layer. When a company has overseas operations, monetary items are translated at the current exchange rate, whereas non-monetary items are often kept at the rate on the date they were acquired.
That treatment can change reported profit materially. For managers, the key point is that non-monetary assets carry operating and valuation risk.
Equipment can become obsolete, stock can spoil, and goodwill can be written down, whereas cash simply sits there. Investors and lenders often look at how much of a company's balance sheet is tied up in non-monetary assets.
A high proportion can mean a business with real productive capacity, but it can also mean cash is scarce and the assets would be hard to sell quickly if money were needed.
In practice
Real-world examples.
Example
A construction firm owns excavators, a depot and a stock of building materials worth $3,000,000 in total. During a period of rising prices, these assets tend to maintain their value, while the cash held in its bank account loses buying power. The firm therefore avoids holding large idle balances.
Example
A software company capitalises $400,000 of development costs as an intangible asset. The balance sheet shows it as a non-monetary asset, and it is amortised over its expected useful life. It cannot be sold for a fixed sum in the way a bank balance can be spent.
Example
A retailer prepays $60,000 for a year of shop rent. The prepayment is a non-monetary asset because it entitles the retailer to a service over time and not to a fixed sum of cash. It is released to expense at $5,000 a month as the rent is used up.
Formula
Calculation
Non-monetary assets = Total assets - Monetary assets
A company reports total assets of $1,200,000. Of this, cash is $150,000, accounts receivable are $250,000 and short-term deposits are $100,000. Monetary assets = $150,000 + $250,000 + $100,000 = $500,000. Non-monetary assets = $1,200,000 - $500,000 = $700,000, which would cover items such as equipment, inventory and prepaid costs. That means $700,000 / $1,200,000 = 58.3% of the asset base is non-monetary, and the remaining 41.7% is monetary and exposed to inflation. A lender reading these figures would ask how quickly the equipment and inventory could be sold if the cash ran short.Case study
Seen in the real world.
Cobalt Bay Logistics is a fictional freight company invented for this illustration. Its balance sheet showed $2,000,000 of cash and receivables against $6,000,000 of trucks, warehouses and parts inventory.
During a spell of high inflation, the board noticed that the cash was losing buying power while the trucks were costing more to replace. The finance team concluded that the real exposure was the gap between the old book cost of the fleet and the higher replacement cost. They set aside a larger annual replacement reserve and stopped holding surplus cash in non-interest-bearing accounts.
They also reviewed the age profile of the fleet and found that several vehicles were fully depreciated yet still earning revenue. That meant the balance sheet understated their economic value and overstated how easily the company could fund replacements from existing resources.
Watch out
Common mistakes.
- Treating all assets as equally safe in inflation. Monetary assets lose purchasing power, but non-monetary assets can lose value through obsolescence or damage.
- Assuming the book value shows market value. Depreciation and historical cost can leave the recorded figure far from what the asset would fetch.
- Forgetting that prepaid expenses and goodwill are non-monetary. They look like financial items but are not claims to a fixed amount of cash.
Questions
People also ask.
Is inventory a monetary or non-monetary asset?
It is non-monetary, because its value depends on the price it can be sold for and not on a fixed amount of cash. Inventory is also usually carried at the lower of cost and the amount it can be sold for, so it can be written down.
Are receivables non-monetary?
No. Receivables are monetary assets because they are claims to a fixed number of currency units.
Why does this distinction matter for foreign currency?
Monetary items are retranslated at current rates while many non-monetary items are held at historical rates, which affects reported gains and losses.
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