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
Examples of monetary items are cash, marketable securities, accounts receivable, accounts payable, sales taxes payable, and notes payable. Monetary assets are cash, marketable securities, and accounts receivable, while monetary liabilities are 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.