A monetary liability represents obligations of an entity that can be settled by a fixed or determinable amount of money. These are liabilities whose amounts have already been established and will not change based on fluctuations in the economy or in the fair market value of goods and services.
Examples of monetary liabilities include:
- Accounts Payable: These are amounts owed to suppliers for goods or services that were purchased on credit but not yet paid for.
- Notes Payable: These are formal written promises to pay a certain amount of money on a specific future date. They can be short-term or long-term liabilities.
- Accrued Expenses: These are expenses that a company has incurred but has not yet paid, such as wages payable, rent payable, or interest payable.
- Loans and Bonds Payable: These are amounts that a company owes to lenders or bondholders and must pay back at a certain time and usually with interest.
These types of monetary liabilities are in contrast to non-monetary liabilities, which cannot be settled by a fixed or determinable amount of money. Non-monetary liabilities might include obligations to deliver a variable number of the company’s own equity instruments, or obligations to deliver goods or services in the future.
The proper management of both monetary and non-monetary liabilities is essential for the financial health of a business. Understanding the nature and extent of these obligations can help a company plan for the future and ensure that it has the resources necessary to meet its liabilities when they come due.
Example of Monetary Liability
Let’s use a hypothetical company, GHI Ltd., to illustrate monetary liabilities.
Assume that GHI Ltd.’s balance sheet includes the following monetary liabilities:
- Accounts Payable: GHI Ltd. has purchased goods worth $200,000 from its suppliers on credit. These goods have been delivered and used, but the invoices have not yet been paid.
- Wages Payable: GHI Ltd. owes its employees $100,000 for work done in the last pay period, which will be paid out on the upcoming payday.
- Interest Payable: GHI Ltd. has a loan on which it has accrued $10,000 in interest that it hasn’t paid yet.
- Notes Payable: GHI Ltd. borrowed $50,000 from a bank six months ago, which is due to be repaid in another six months.
- Bonds Payable: GHI Ltd. issued bonds worth $500,000 a few years ago, which are due to be repaid to bondholders in future years.
In this scenario, GHI Ltd.’s total monetary liabilities amount to $860,000 ($200,000 + $100,000 + $10,000 + $50,000 + $500,000).
Each of these liabilities represents a fixed or determinable amount of money that GHI Ltd. owes and will need to pay in the future. This contrasts with non-monetary liabilities, which might include obligations that cannot be settled by a fixed or determinable amount of cash.