. Comment the differences between investment in financial and physical assets Liquidity
Answers
Answer:
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.
Explanation:
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.