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Wednesday, 25 January 2012

Borrowing costs are not monetary items

Borrowing costs are not monetary items

Borrowing costs, interest paid, bank charges, interest received, etc are constant real value non-monetary items.

They appear to be monetary items because banks almost always charge them to bank accounts on the day they are due.

Inflation has no effect on the real value of non-monetary items. The above items are thus never affected by inflation.

When they are not measured in units of constant purchasing power in terms of a Daily Consumer Price Index then their real values are eroded – at the rate of inflation because money is used as the medium of exchange – by the stable measuring unit assumption.

Nicolaas Smith

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