Physical asset

From CEOpedia | Management online

Physical asset (tangible asset) is the basis in the economy. It include material goods owned by a company. From the economic point of view, assets are future benefits that arise as a result of transactions or events.

There are three main types of assets:

  • tangible assets
  • intangible assets
  • financial assets

Tangible assets

Tangible assets can be divided into fixed assets and current assets like cars, machinery, buildings, equipment, accessories or even office supplies.

This can be anything that has physical presence as a result of something that one can be touched. Company uses tangible assets to produce different goods and services - they have a definite goal. A fixed asset is any tangible resource which should be used in normal operations for more than one year and is not designed for resale. Noncurrent assets are always classified on the balance sheet. Intention of use of assets allows them to be qualified. It means that when a company in a given area builds a factory for its operation, it will qualify it as a permanent asset. The land bought for sale to a developer is an investment. The purpose of fixed assets is quite clear. Companies want to acquire and productively use fixed assets for some time to dispose them later.

Fixed assets in the period of use are subject of systematic and rational allocation of costs, also called depreciation. When purchasing fixed assets, their cost cannot be deducted as a taxable cost in the year of acquisition. When we buy or sell fixed assets, we assume that it has been replaced with money for another asset. For example, the depreciation of the machine in any given year is treated as cost, what is very important in the context of taxation.

Current physical assets are treated as financial assets, which are swapped into cash through the normal production cycle. These are physical assets such as raw materials, work in progress inventories, finished goods and goods held for resale. Physical objects may be financial assets held as a stock in one company while in other companies it may constitute a fixed asset.

Intangible assets

They include patents, trademarks, branding, copyrights or intellectual properties.

They do not have a physical character, the driving force is among others, employee knowledge including technology knowledge. Intangible assets are crucial for company to provide appropriate amount of values, that will be interesting from client perspective. They are the ultimate source of their creation.

Both types of assets are very important for economy, because they produce goods and services. Possessing many physical resources, in comparison to small amount of non-physical resources is often risky in case of e.g. global crisis or growing inflation. Victim of such approach is Venezuela, that before crisis (same as after) did not invest into human capital and always produced small output per person with rates leaving a lot to be desired.

Financial assets

Financial assets also can be identified - such as stocks, bonds, cash or bank deposits.

Financial assets are different from physical assets. They may have fluctuation of value, but unlike physical assets do not lose value in time. Various services: financial, legal or health in our economy have values that are not based on tangible assets, but similar to tangible assets they can be earned on securities such as stocks and bonds. The shares represent the owners of the company and thanks to that they have claims for company profits. In turn, bonds are claims for specific payments in time, thus the they are form of a loan. Allows specify value all real assets. They do not necessarily have inseparable physical worth. Securities are financial claims as long as they are traded wages. Another important attribute of securities is that can facilitate transactions. The contracts can be standardized and minimized and the markets for financial assets can be changed to be as the most beneficial.

Examples of Physical asset

  • Buildings: Buildings are physical assets that have a long life, usually more than one year, and are used to produce income or to provide services. Examples include company offices, retail stores, warehouses, factories, and hospitals.
  • Machinery and Equipment: Machinery and equipment are physical assets that are used to produce or provide services. Examples include computers, vehicles, office furniture, printing presses, and manufacturing machinery.
  • Land: Land is a physical asset that cannot be moved or destroyed. Examples include real estate properties, such as farms, factories, and large tracts of land.
  • Inventory: Inventory is a physical asset that is held for resale or to be used in the production of goods and services. Examples include raw materials, finished goods, and spare parts.
  • Intangible Assets: Intangible assets are non-physical assets such as copyrights, patents, trademarks, and goodwill. Examples include software, databases, brand names, and customer relationships.

Advantages of Physical asset

Physical assets are valuable resources for businesses, providing a variety of advantages. These advantages include:

  • Increased control over all aspects of production. Physical assets can be monitored and managed in a way that intangible assets cannot. This allows for better control over production, which can result in increased efficiency and higher quality output.
  • Long-term value. Unlike intangible assets, physical assets can be used for a long period of time. This means that businesses can continue to benefit from them for a long time, allowing for more stability and greater returns on investment.
  • Tangible results. Physical assets are tangible, which means that they can be seen and felt. This makes them easier to manage and also allows businesses to observe and measure progress more easily.
  • Faster asset turnover. Physical assets are often easier to sell than intangible assets, making them more liquid. This can result in quicker turnover of assets, allowing businesses to use their resources more effectively.

Limitations of Physical asset

Physical assets have several limitations:

  • They are limited in terms of availability, meaning that only a certain number of physical assets can be owned.
  • They are subject to physical depreciation, meaning that their value decreases over time.
  • They require maintenance and repairs, which can be expensive and time-consuming.
  • They are vulnerable to theft and other forms of damage.
  • They are often difficult to transport, meaning that they may need to be stored in a secure location.
  • They can be difficult to liquidate, meaning that it may take time to turn them into cash.

Other approaches related to Physical asset

Physical assets are the cornerstone of an economy and can include items such as buildings, equipment, land, and other tangible goods owned by a company. Other approaches related to physical assets include:

  • Depreciation - this is the process of allocating the cost of an asset over its lifespan, usually for accounting and tax purposes.
  • Maintenance - this is the process of preserving and protecting the asset from damage, wear, or decay.
  • Insurance - this is the process of protecting the asset from theft, loss, or damage by purchasing insurance coverage.
  • Security - this is the process of protecting an asset from unauthorized access or use by implementing security measures such as locks and alarms.

In summary, physical assets are the basis of an economy and require various approaches to maintain, protect, and insure them.


Physical asset — recommended articles
Nonmonetary assets — Capital property — Paper asset — Gross fixed assets — Real asset — Capital resource — Classification of assets — Financial resources — Fixed capital

References

Author: Anna Korzeń

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