What are Monetary Assets?
Monetary Assets are those short term assets that can be liquidated easily and quickly like cash and cash equivalents, short term investments, receivables, etc. Their value is fixed in terms of the money they are not subject to depreciation or appreciation.
Monetary Assets Examples
- Cash: Cash can be referred to as a legal tender, which can be used to trade in goods, services, or debts. They can be in the form of currency or coins. Cash has a fixed amount of value, although the purchasing power might be affected due to the macroeconomic factors prevailing in the economy like inflation.
- Bank Deposits: Bank deposits refer to the money placed by the person with the banks or the other financial institutions. This deposit can be made in the accounts, including checking accountsChecking AccountsChecking Account, also known as a transactional account, can be defined as a kind of deposits account held by a financial institution or non-banking financial institution which allows the holder of the account to deposit and withdraw money. This is one of the most liquid forms of money. It differs from a normal bank savings account since it allows multiple deposits and withdrawal in a particular period.read more, savings account, and money market accountMoney Market AccountMoney Market Account is the account which receives all the interests from the instruments in the money market according to the agreed-upon terms. This account is separate from that of securities account, it only accounts for the proceeds.read more. These are treated as monetary assets. A person can withdraw money from these accounts, mostly, as and when required, like a fixed cash amount.
- Trade Receivables: Trade receivablesTrade ReceivablesTrade receivable is the amount owed to the business or company by its customers. It is also known as account receivables and is represented as current liabilities in balance sheet.read more refers to the amount owed by the customers of the company to it with respect to the goods sold for which the payment has not been received yet from the customers. The amounts to be received against them will remain the same and will not change, even though the value of goods that were sold alters at the time of receipt of payment.
- Other Receivables: They are to be settled through the cash mode, and their value does not change with respect to a time period.
- Investments in Debt Capital: The investment in the debt capital will remain the same at the time of its maturity and would not change with the change in the time period.
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Features
#1 – Fixed in Value but may Result in Decline in Real Value
This value is fixed in terms of money for example if a company has $20,000 in cash the value after one year also remain the same, i.e., $20,000 only but the effect of inflation affects it like the thing which was $20,000 last year might be higher than $20,000 in the current year. Hence the change in value in real terms is possible in the case of monetary assets.
#2 – Re-Statement in Financial Statements
These are in the form of cash equivalentsCash EquivalentsCash equivalents are highly liquid investments with a maturity period of three months or less that are available with no restrictions to be used for immediate need or use. These are short-term investments that are easy to sell in the public market..read more that are to be valued at the current market value at every balance sheet date, for example, foreign receivables, short term investmentsShort Term InvestmentsShort term investments are those financial instruments which can be easily converted into cash in the next three to twelve months and are classified as current assets on the balance sheet. Most companies opt for such investments and park excess cash due to liquidity and solvency reasons.read more, foreign currency held as cash in hand. All these assets are to be valued at real value, and other monetary assets have fixed value.
#3 – Other Features
- Easily Liquidate
- Can use and converted into cash at the time of need
- A ready market for sale is available
- Not subject to depreciation
- Can be used for working capitalWorking CapitalWorking capital is the amount available to a company for day-to-day expenses. It's a measure of a company's liquidity, efficiency, and financial health, and it's calculated using a simple formula: "current assets (accounts receivables, cash, inventories of unfinished goods and raw materials) MINUS current liabilities (accounts payable, debt due in one year)"read more
Need
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- For Meeting Daily Expenses – As business needs the money in real terms for meeting day to day expenses and paying wages to the workers etc. It is much needed for it.
- For Working Capital Cycle – These are required for working capital, i.e., for paying to creditors and receipts from debtors and giving advances or short-term loansShort-term LoansShort term loans are the loans with a repayment period of 12 months or less, generally offered by firms, individuals or entrepreneurs for immediate liquidity requirements. These are usually provided at a higher interest rate, these short term loans often have a weekly repayment schedule.read more to employees and others.
- For Maintaining Liquidity – As Business risk is uncertain anytime money can be needed for meeting unplanned expenditures; hence certain liquidity is required; therefore, there is a need for monetary assets in every business entity.
- Fixed in Value and Lower Risk – As the value of such assets is fixed in nature; hence, they carry an obligation to deliver a certain amount at times of need because of their static nature.
Importance
- They contain an obligation to deliver the specified value, which can be converted into cash quickly.
- The working capital cycle is vital for business organizations, and monetary assets can be used in case of a slow down of working capital, and business can be conducted smoothly.
- It gives assurance to stakeholders that the company has certain liquid funds. If in the case, any financial crisisFinancial CrisisThe term "financial crisis" refers to a situation in which the market's key financial assets experience a sharp decline in market value over a relatively short period of time, or when leading businesses are unable to pay their enormous debt, or when financing institutions face a liquidity crunch and are unable to return money to depositors, all of which cause panic in the capital markets and among investors.read more arises, then liquid funds help the business to stand and safety tool for stakeholders.
- It assures creditors and other lenders that their money is safe, and business organization will repay their obligations timely.
Conclusion
- These are those assets that can be easily convertible into cash like cash and cash equivalentsCash And Cash EquivalentsCash and Cash Equivalents are assets that are short-term and highly liquid investments that can be readily converted into cash and have a low risk of price fluctuation. Cash and paper money, US Treasury bills, undeposited receipts, and Money Market funds are its examples. They are normally found as a line item on the top of the balance sheet asset. read more, short term investment, and advances, etc. It ensures that the company runs smoothly even in case of a slowdown of the working capital cycle.
- These are of much importance for every business organization. It is so because every business needs real cash for dealing day to day and petty cash transactions. These are different from non-monetary assets in terms of quick conversion and ready market.
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