Difference Between Financial Assets and Physical Assets

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

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

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.