Monetary items are items in an entity's financial statements that represent a fixed or determinable amount of money, and are held or owed in a currency. Examples of monetary items include cash, accounts receivable, accounts payable, loans payable, and bonds payable.

Monetary items are treated differently than non-monetary items in financial reporting. Non-monetary items are items that represent ownership interests or other non-monetary rights or obligations, such as property, plant, and equipment, inventories, and intangible assets. The treatment of non-monetary items can depend on various factors, such as their useful life, their fair value, and their ability to generate future cash flows.

In contrast, monetary items are generally valued at their nominal value (i.e., their face value or original amount), adjusted for any changes in currency exchange rates, in accordance with the accounting standards and frameworks. The treatment of monetary items is relatively straightforward because their value is fixed or determinable, and their primary characteristic is their monetary value.

Let's say a company has the following monetary items on its balance sheet at the end of the reporting period:

• Cash: $100,000
• Accounts receivable: $50,000
• Accounts payable: $30,000
• Loan payable: $200,000

Assuming that the company's functional currency is the U.S. dollar, and the exchange rate at the end of the reporting period is $1.00 = €0.85, the company would adjust the values of its monetary items to reflect the exchange rate. This would result in the following values:

• Cash: $100,000
• Accounts receivable: $50,000 x 0.85 = €42,500
• Accounts payable: $30,000 x 0.85 = €25,500
• Loan payable: $200,000 x 0.85 = €170,000

In this case, the company has adjusted the values of its monetary items to reflect the exchange rate between the U.S. dollar and the euro. The cash item remains in U.S. dollars, as it is a U.S. dollar-denominated asset. However, the accounts receivable, accounts payable, and loan payable items are adjusted to reflect their euro-equivalent values.

The treatment of monetary items is relatively straightforward, as their values are fixed or determinable, and their primary characteristic is their monetary value.

Here's a tabulated example to illustrate the adjustment of monetary items for currency exchange rate:

In this example, the amounts of the monetary items are adjusted based on the exchange rate of $1.00 = €0.85. The cash item remains in U.S. dollars, while the accounts receivable, accounts payable, and loan payable items are adjusted to reflect their euro-equivalent values.