Financial Assets vs Physical Assets
Assets are commonly known as anything with a value that represent economic resources or ownership that can be converted into something of value such as cash. Financial assets and physical assets, both represent such ownerships of value, even though they are very different to each other based on their features and characteristics. Since many easily confuse the two types of assets to be of similar meaning, the following article provides a solid explanation of the difference between the two, and explore a few points that may help readers understand the difference between these two types of assets.
Financial assets are intangible, meaning that they cannot be seen or felt and may not have a physical presence except for the existence of a document that represents the ownership interest held in the asset. It is important to note that the papers and certificates that represent these financial assets do not have any intrinsic value (the paper held is only a document certifying ownership and is of no value). The paper derives its value from the value of the asset that is represented. Examples of such financial assets include stocks, bonds, funds held in a bank, investments, accounts receivable, company goodwill, copyrights, patents, etc. Regardless of the fact that financial assets do not exist in physical form, they are still recorded in a firm’s balance sheet, to represent the value that is held by them.
Physical assets are tangible assets and can be seen and touched, with a very identifiable physical presence. Examples of such physical assets include land, buildings, machinery, plant, tools, equipment, vehicles, gold, silver, or any other form of tangible economic resource. From an accounting point of view, physical assets refer to the things that may be liquidated when the entity wound up its interest. Physical assets have a useful economic life, when it ascertains its age it may be disposed off. They usually experience a reduction in value due to wear and tear of the asset through continuous use known as depreciation, or may lose their value in becoming obsolete, or too old for use. Certain tangible assets are also perishable, such as a container of apples, or flowers that need to be sold soon in order to ensure that they do not perish and lose their value.
What is the difference between Financial Assets and Physical Assets?
The main similarity between tangible and physical assets is that they both represent an economic resource that can be converted into value, and both assets are recorded in a firm’s balance sheet. The main difference between the two is that physical assets are tangible and financial assets are not. Physical assets usually depreciate or lose value due to wear and tear, whereas financial assets do not experience such reduction in value due to depreciation. However, financial assets may lose value to changes in market interest rates, fall in investment returns or fall in the stock market prices. Physical assets also require maintenance, upgrades and repairs, whereas financial assets do not incur such expenses.
Financial vs Physical Assets
• Financial assets are intangible, physical assets, on the other hand, are tangible. Both assets represent value that can be converted into cash.
• Financial assets lose value due to changes in market yields and other market price fluctuations, whereas physical assets lose value due to depreciation, wear and tear.
• Physical assets can be depreciated over their useful life, while financial assets can be revalued.
• physical assets are disposed off when they served for their useful economic life, but financial assets are redeemed when they mature.
• Financial assets are recognized at fair value (present value of future cash flow), while physical assets are recognized at cost.
• Financial assets may yield cash flows of return during the time that they are held and a final receipt on the asset’s face value. Physical assets, on the other hand, may receive such cash flows in terms of rent or may contribute to increased earnings through the use in the production or increase in market value at the point of sale.
• Financial assets do not require additional costs to keep them functional, but physical assets may need to be repaired, maintained and upgraded from time to time.