Monetary item definition
/What is a Monetary Item?
A monetary item is an asset or liability that conveys a right to receive or deliver either a fixed or determinable number of units of currency. Monetary items continue to be convertible into the same amount of currency over time. Their main characteristic is that they represent a sum of cash, into which they can be readily converted.
Nonmonetary items tend to be convertible into varying amounts of money, based on changes in supply and demand and the presence of obsolescence. For example, a monetary item such as a certificate of deposit is convertible into $1,000, while a vehicle will likely decline in value over time as it ages.
Examples of Monetary Items
Here are multiple examples of monetary items:
Physical Currency
Coins. Pennies, nickels, dimes, quarters, euros, yen coins, etc.
Banknotes. Dollar bills, euro notes, yen bills, etc.
Digital and Electronic Currency
Cryptocurrencies. Bitcoin, Ethereum, Dogecoin, etc.
Digital payment balances. PayPal balance, Venmo balance, etc.
Bank Instruments
Checks. Personal checks, cashier's checks, money orders.
Savings certificates. Certificates of deposit (CDs).
Promissory notes. Legal documents representing an obligation to pay.
Precious Metals
Gold coins
Silver bars
Platinum bullion
Government-Backed Securities
Treasury bonds
Treasury bills
Monetary liabilities include accounts payable, sales taxes payable, and notes payable.
Impact of Inflation on Monetary Items
When monetary assets are held, their purchasing power tends to decline as inflation reduces their value. Conversely, when monetary liabilities are held, their purchasing power increases, because they can be paid off with funds that have declined in value because of the effects of inflation.
FAQs
How are Monetary Items Treated in Foreign Currency Translation?
In foreign currency translation, monetary items are remeasured using the exchange rate in effect at the balance sheet date. This ensures that receivables, payables, and other cash-based items reflect current exchange rate values. Any resulting gains or losses from remeasurement are typically recognized in the income statement.