Sunday, 27 July 2008

Monetary items

The second distinct economic item is a monetary item.

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Monetary items constitute the Money supply.

Updated on 11-05-2013

The definition of monetary items is critical for the classification of non-monetary items since the latter are all items that are not monetary items. If the definition of monetary items is wrong then the definition of non-monetary items will also be wrong. This will affect the valuing of monetary and non-monetary items and the correctness of both accounting records and financial reports.


Money is the greatest economic invention of all time. Money did not exist and was not discovered. It was invented over a long period of time.

Money was critical for the level of economic development achieved to date. Modern economic development would have been very slow indeed if money was not invented. Money is one of the greatest human inventions of all time. It ranks on par with the invention of the wheel and the Gutenberg press.

Money held

Examples of money held are bank notes and bank coins.

Monetary values pertaining to money

All economic items have monetary values. Both non-monetary items and monetary items are expressed in monetary values. They are expressed in terms of money. Money is used as the unit of account or measuring unit. Variable, constant and monetary items are all expressed in terms of money and have monetary values.

There is, however, a difference between having a monetary value and being a monetary value. All economic items have monetary values, but, only monetary items are monetary values. Non-monetary items have monetary values, but, they are not monetary items.

A house has a monetary value but it is not a monetary item. A house is a variable real value non-monetary item whose value is expressed in terms of money.

Likewise a salary has a monetary value but it is not a monetary item. A salary is a constant real value non-monetary item whose value is expressed in monetary terms.

Examples of monetary values pertaining to money:

Bank account balances
Money loans
Consumer credit
Bank credit
Notes payable
Notes receivable

The above are monetary values pertaining only to money. They are accounted monetary balances or accounted values of money lent or borrowed, payable or receivable in money.

The original nominal values lent or borrowed – the capital values - in the case of loans are nominal and fixed.

Inflation destroys the real value of money over time. Inflation thus destroys the real value of their capital values over time at the rate of inflation as determined by the change in the Consumer Price Index.

The above monetary values that are monetary items have exactly the same attributes as money held with the single exception that they are not actual bank notes and bank coins but accounted monetary values.

Examples of constant real value non-monetary items often wrongly treated as being monetary items:

Trade debtors
Trade creditors

Functions of money

Money has three functions.

1. Medium of exchange
2. Store of value
3. Unit of account

Only an economic item that fulfils all three functions of money at the same time can be money in a specific economy or monetary union. Fulfilling only two of the three functions does not qualify an economic item as money. See Foreign Exchange.

Medium of exchange

Money is a medium of exchange which is its main function. The principle reason money was invented was to serve first and foremost as a medium of exchange.

External market

Money is a medium of exchange for external trade in goods and services and other economic transactions between economic entities in different countries and/or monetary regions. Foreign currencies are bought and sold on a daily basis in foreign exchange markets at exchange rates determined by demand and supply in those markets.

Only the classification and valuation of foreign exchange in the internal economy is included in the scope of this book. See Foreign Exchange.

Internal market

Money’s main function in the internal market is that it is a medium of exchange used in the transfer of economic items between economic entities. Money is only accepted as a medium of exchange while it fulfils all there functions of money. When the official functional currency loses all its value at the end of a hyperinflationary spiral, it has no store of value function and stops being money.

Store of value

The fact that the first types of money consisted of gold or silver coins developed into money’s second function, namely, being a store of value.

The actual coin was worth its value in gold or silver. Sometimes the value of gold bullion was more than the value of the gold coins were made of. People then melted the coins and sold the gold in bullion form for a higher price.

Next money was not made of precious metal coins but money consisted of bank notes the real values of which were fully backed by gold reserves.

Today our bank notes and bank coins have no intrinsic value and they are not backed by gold reserves or other precious metal reserves. Today our money is backed by all the underlying value systems in our economy.

Some, but not all, of these underlying value systems are:


Political government
Judicial system
Law enforcement system
Economic policies
Monetary policies
Commercial policies
Industrial policies
External trade policies
Education policies
Health policies
International relations
Defence policies
Accounting model
Regional policies

The abuse of money’s store of value function led to original inflation. Money is a store of real value over time. Unfortunately inflation destroys the real value of money over time.

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