Physical asset
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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.
References
- Godwin Norman H., Alderman C. Wayne (2010). Financial ACCT. South-West Thomson Learning.
- Hastings Nicholas A. J. (2010). Physical Asset Management. Springer.
- Ho Thomas SY, Lee Sang Bin (2004). The Oxford Guide to Financial Modeling Applications for Capital Markets, Corporate Finance, Risk Management and Financial Institutions. Oxford University Press.
- Kaplan R., Norton D. (2003). Strategy maps. Converting intangible assets into tangible outcomes. Harvard Business Press.
- Peterson Raymond H. (2002). Accounting for Fixed Assets. Wiley (2 edition).
Author: Anna Korzeń
