Nonmonetary Items: Assets and Liabilities
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.
The dollar is a unit of measure used to quantify the value of assets and liabilities appearing in a company’s financial statements. Nonmonetary items are those assets and liabilities appearing on the balance sheet that are not cash, or cannot be readily converted into cash. Generally, nonmonetary assets include fixed assets such as property, plant and equipment as well as intangible items such as goodwill.
Nonmonetary liabilities include those obligations that are not payable in cash, or items that will adjust an expense. For example, a company may provide warranty service on its products. While it’s possible to quantify the potential value of this obligation to customers based on historical product defect information, it is not payable in dollars.
Unlike monetary items, the value of a nonmonetary item can change over time. For example, a piece of equipment will lose value over time as its useful life is consumed. Inflation can also lower the value of a nonmonetary item. The market forces of supply and demand can also affect the value of nonmonetary items. For example, if competitors drive down the sales price of a product, the value of the company’s inventory will also go down.
The concept of nonmonetary items is important to alternative accounting methods such as constant dollar accounting and current cost accounting. 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 at their fair market value rather than historical cost.