Physical Assets vs Financial Assets
Assets are widely defined as something with a value that can be turned into anything of value, such as cash, reflecting economic capital or ownership. Both financial assets and physical assets reflect certain ownerships of value, but based on their attributes and characteristics, they are somewhat different from each other. Since the two types of assets are of similar importance and are easily misunderstood by many, the following article offers a strong overview of the distinction between the two and discusses a few points that may help readers understand the difference between these two types of assets.
Financial Assets:
Financial assets are intangible, meaning that, except for the existence of a record that reflects the ownership interest held in the asset, they may not be seen or felt and do not have a physical appearance. It is important to note that there is no intrinsic value in the documents and certificates which represent these financial assets (the paper held is only a document certifying ownership and is of no value). The paper derives its value from the value of the represented asset. The stocks, shares, funds kept in a bank, deposits, accounts receivable, business goodwill, copyrights, patents, etc. are examples of such financial properties. Regardless of the fact that financial assets do not exist in a tangible form, to reflect the value owned by them, they are still reported on the balance sheet of a corporation.
Physical Assets:
Physical assets are tangible assets that can, with a very identifiable physical appearance, be seen and touched. Land, buildings, machinery, plants, machines, equipment, automobiles, gold, silver, or any other type of tangible economic resource are examples of such physical assets. Physical assets, from an accounting point of view, refer to the items that can be liquidated when the company liquidates its interest. When it determines its age, it can be disposed of, physical assets have a valuable economic existence. Typically, due to the wear and tear of the asset from constant usage known as depreciation, they suffer a decline in value or can lose their value by being redundant or too old for use. Any tangible assets, such as an apple container or flowers that need to be sold quickly, are often perishable in order to ensure that they do not die and lose their value.
What is the distinction between Physical Assets and Financial Assets?
The key similarity between physical and tangible assets is that both reflect an economic resource that can be turned into value, and both assets are reported on the balance sheet of a business. The key distinction between the two is that physical assets are tangible and that they are not financial assets. Physical assets typically depreciate or lose value due to wear and tear, although, due to inflation, financial assets do not suffer such a reduction in value. However, because of changes in market interest rates, decreases in investment returns, or decreases in stock market prices, financial assets can lose value. Maintenance, upgrades, and maintenance are also required for physical assets, while financial assets do not incur such expenses.
Financial vs Physical Assets:
- Financial assets are intangible and, on the other hand, physical assets are observable. The value of both properties can be translated into cash.
- Financial assets lose value due to market yield changes and other fluctuations in market values, while physical assets lose value due to depreciation, wear and tear.
- Through their useful life, tangible assets can be depreciated, while financial assets can be revalued.
- When they have completed their beneficial economic existence, physical assets are disposed of, but when they age, financial assets are redeemed.
- Financial assets (present value of potential cash flow) are recognized at fair value, whereas physical assets are recognized at cost.
- During the time they are kept and a final receipt on the asset’s face value, financial assets can yield cash flows of return. On the other hand, physical assets either obtain certain cash flows in terms of rent, which may lead to an increase in earnings by the use of output or, at the point of sale, to an increase in market value.
- To keep them functional, financial assets may not need extra costs, but physical assets may need to be repaired, maintained, and updated from time to time.
- To keep them functional, financial assets may not need extra costs, but physical assets may need to be repaired, maintained, and updated from time to time.
Please note,
The views in the article/blog are personal and that of the author. The idea is to create awareness and for educational purpose and not intended to provide any product recommendations.
