Distinction Between A Real Asset And A Financial Asset: Generally assets are properties owned and controlled by an organization that can generate income for the organization. Assets are the backbone and lifeblood of any organization because they enable them to create more wealth in the future. We can classify assets into two major classifications which are Real Assets and Financial Assets.
In this article, we will look at the key differences between these two assets to any organization. But before we dive into the differences, let us look at the meaning and examples of these assets.
1. Real Assets: Real Assets are tangible assets owned by an organization that can be seen and touched and are expected to generate futuristic income for the organization. Usually, these kinds of Assets are expected to last in the organization for more than a complete business year of operation.
The real assets of an organization can be seen in the balance sheet statement of an organization under the fixed assets classification. It is important you know that the real assets of any organization are an important factor in calculating the financial position of the organization.
In a nutshell, real assets are assets that are of physical value to an organization. Real assets are made to produce “tangible” returns, which are returns that outperform inflation.
Good examples of real assets include vehicles, real estate properties, precious metals, office buildings, and other natural resources
2. Financial Assets: Non-physical assets with a future inflow of money known as Financial Assets are those resulting from contractual agreements or rights of ownership. Financial Assets are also referred to as liquid assets or investment assets.
Liquid assets are sub-classifications of assets that can be easily changed form.
Additionally, In most cases, Financial assets can be found in the balance sheet statement of an organization’s financial statement under the equities segment.
According to IFRS 9, Financial Assets can be classified into three categories:
- Fair Value Through Comprehensive Income
- Fair Value through Profit and loss
- Amortized Cost
Examples of Financial assets include the following: cash and cash equivalents, stock, bonds, debentures, bank deposits, demand deposits, loans, receivables, and so on.
Now you know what Real and financial assets are and their examples. Let us dive into the key differences between them.
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10 Distinctions Between A Real Asset And A Financial Asset
1. Asset Form: Real Assets are most times physical assets that can be seen or touched and are primarily used for the production of goods, rendering of service, or to aid the organization’s mode of operation.
Financial Assets are non-physical assets that cannot be seen or touched except for documents/files representing the claims on the future cash flow real assets generate.
2. Liquidity: I stated earlier, financial assets are also regarded as liquid assets because they can easily change form. It easier way to measure their convertibility to other forms is how easily it can be converted to cash or cash equivalent. Real assets are not liquid assets because they have a large market value.
It is important you know that Real assets are typically less marketable than financial assets.
3. Valuation: Asset valuation is the process of figuring out an asset’s actual, true, or current market value.
Real assets have a value that is inherent to them, in other words, Real assets have intrinsic value, while financial assets can be valued either by amortization cost or fair value through profit or loss or fair value through other comprehensive income. The method used for valuing financial assets is dependent on the organization.
4. Divisibility: Assets’ divisibility refers to the smallest amount or size at which they can be traded. Financial assets because of their nature have greater divisibility than Real assets which are most times of physical substance.
5. Growth Possibility: Both Assets have economic growth possibilities but financial assets Compared to actual assets, financial assets have greater development potential but also pose more risk to the owners.
It is also important you know that financial assets are easier to trade in the market than real assets.
6. While financial assets simply describe how income or wealth is distributed among investors, real assets produce net income for the economy.
7. Examples of real assets include plants, properties & equipment, Land and buildings, motor vehicles, precious metals, natural resources, and so on while examples of financial assets include shares, stock, bonds, debentures, bank deposits, demand deposits, loans, receivables cash reserve and other derivatives and equities on
8. Real assets create net profits for the business, whereas financial assets determine how much money goes to which shareholders.
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9. Financial assets can be displayed in either the asset section or liabilities depending on their value at the end of the financial year, however, real assets are always displayed on the assets side of any balance sheet.
10. Real assets provide their owner with more protection against inflation, whereas financial assets provide little to no protection.
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In conclusion, it is important I state that even though these assets are identified differently, they still have some similarities. One of which is the fact that both assets are very valuable to any organization as they offer futuristic benefits to the organization in the long run.
Any organization can improve its organizational goals and objectives by being aware of the distinctions and similarities between these two assets.
I recommend you read through this article below to get a better comprehension of some other accounting topics related to real assets and financial assets: