You can classify Assets in different ways.
Assets can be tangible or intangible, liquid or illiquid, current (short-term) or non-current (long-term), operating or non-operating, etc.
In this article, we will compare assets from another angle:
Real Vs Financial.
What is a Real Asset?
A Real Asset is a tangible asset with its own Intrinsic Value. It’s something you can touch – a car, a building, a factory, machinery, equipment, inventory, etc.
Real assets could be Current Assets or Non-current assets.
Current Assets are those which you plan to sell and convert into customer cash in the current fiscal year or the next 12 months.
Inventory is a current asset that is also a Real Asset. Inventory, in most cases, is tangible and it is something you plan to sell in the near future.
On the other hand, machinery is an example of a non-current Real Asset. You’ll typically use machinery for many years making it a non-current asset.
What is a Financial Asset?
Financial Assets are intangible assets that do not have any Intrinsic Value of their own.
So, while they do have monetary value, they derive this value from the Intrinsic Value of an underlying asset.
Examples of Financial Assets include shares, bonds, loans, derivatives, etc.
Real Vs Financial Assets: Key differences
As you have seen, real assets are tangible while financial assets are intangible. If you can touch it and it is an asset, it is a Real Asset.
Financial assets are highly liquid and can usually be quickly converted into cash. Most financial assets also benefit from being tradeable on financial markets.
Real assets are generally less liquid and cannot as quickly be converted into cash.
It takes longer to sell a factory with this equipment and machinery than to sell shares on the stock market.
Real assets have their own intrinsic value which is linked to their own physical being. Financial assets, on the other hand, do not have their own intrinsic value.
Their value depends on the value of some other asset that may or may not be tangible but which has its own Intrinsic Value.
Real assets, if they are non-current assets, can be depreciated over their useful life.
For instance, you could depreciate a computer over a period of 3 years.
Similarly, you could appreciate machinery over a period of eight to 10 years, depending on the expected useful life of that machinery.
Depreciation is the gradual loss of the value of an asset over time.
And so, if an asset does not automatically lose its value over time, it cannot be depreciated. That’s why Financial Assets like stocks or bonds cannot be depreciated.
For the same reason, some non-current fixed asses like Land cannot be depreciated.
|Real Assets||Financial Assets|
|Real assets are tangible.||Financial assets are intangible.|
|Real assets have Intrinsic Value||Financial assets derive their value from other assets with Intrinsic Value|
|Real assets are not very liquid cannot usually be quickly converted into cash.||Financial assets are generally quite liquid and can be quickly converted into cash.|
|(Most) Non-current real assets can provide tax benefits because they can be depreciated.||Financial assets cannot be depreciated.|