What are financial assets?

Definition and Examples of Financial Assets

How Financial Assets Work

Types of Financial Assets

Financial Assets vs. Real Assets vs. Intangible Assets

Definition and Examples of Financial Assets

Financial assets are liquid assets such as shares of stock or bank deposits that derive their value from a contractual claim or ownership of an underlying asset. The underlying asset can be anything from commodities to real estate. These tangible and physical assets are often related to financial assets, such as futures contracts for commodities or real estate investment trusts (REITs), respectively.

The most common types of personal financial assets are bank deposits and investment portfolios. In the United States, according to recent data, the majority of personal financial assets are held mainly in checking accounts, with the second most commonly used financial asset being retirement accounts.

Financial assets are considered liquid because they can generally be easily sold, but they may lose value over time. If a company or individual has high liquidity, it means they have enough assets to meet financial obligations.

Companies also have financial assets, including those that take the form of accounts receivable and bonds receivable. This information is listed in the company’s financial statement. To better understand what qualifies as a financial asset, let’s take a look at Home Depot’s balance sheet as of May 2, 2021, according to the U.S. Securities and Exchange Commission (SEC).

In this case, the main financial assets are cash and cash equivalents as well as accounts receivable. Cash includes all deposits with Home Depot, down to the store level, while cash equivalents are short-term investments that can be converted to cash within three months, such as a money market account. Accounts receivable are any funds owed to Home Depot by customers and borrowers.

The above-mentioned assets are financial assets because their value derives from a contractual agreement.

Your personal financial statement may look similar to that of Home Depot, but it is less complex. Cash and cash equivalents are your checking and savings accounts, along with any brokerage or retirement accounts. Accounts receivable are any funds you have lent to people.

How Financial Assets Work

As mentioned, financial assets are any assets that derive their value from a contract or other claim. Specifically, according to International Financial Reporting Standards (IFRS), a financial asset is any asset that is:

• Cash
• A capital instrument of an entity
• A contractual right to receive cash or another financial asset, known as accounts receivable, or to exchange financial assets or liabilities with another entity
• A contract that will be settled in equity instruments of the entity

To fully understand how financial assets work, it is best to explain the types of financial assets in detail, as each type operates differently.

Types of Financial Assets

Here is a breakdown of some of the most common types of financial assets, specifically for investors.

Cash and Cash Equivalents

Cash and cash equivalents include any savings deposits, certificates of deposit (CDs), money market deposit accounts, and money market funds. These assets are considered safe and strong investments guaranteed by the federal government. For example, a CD is a type of savings account offered by banks and credit unions that typically earns interest at a fixed rate.

For deposit accounts, you enter into an agreement with the financial institution and receive monthly statements showing the value in the account. Accounts are generally insured up to $250,000 by the FDIC, and the type of bank account is determined by how accessible the funds are. For example, checking or savings accounts can be accessed at any time, while CDs lock your money for a specified period.

Accounts

Accounts Receivable

Generally, accounts receivable are short-term business assets where a customer signs a contract guaranteeing that they will pay for the service or product within less than a year. Unlike other financial assets, the value of accounts receivable depends on the amount owed and the likelihood of payment. This type of asset is used in the financial statements of many companies as well as universities, including Cornell University.

Stocks

Stocks are often considered the riskiest financial assets, but they also offer the greatest potential for growth. Stocks represent ownership in a publicly traded company, meaning that when you purchase a share of a company, you become part owner of that company.

Bonds

Bonds are a type of fixed-income investment where the issuer borrows financial securities from investors. They work in the same way as loans in that the borrowing organization promises to repay the bond at an agreed-upon date. They enable companies to finance short-term projects and tend to offer moderate returns.

Financial Assets vs. Real Assets vs. Intangible Assets

The other two types of assets you will find on your personal or business financial statement are real assets and intangible assets. Real assets are those that are tangible or exist in reality, such as real estate, commodities, or equipment. Intangible assets are things like patents, trademarks, or goodwill that do not have a physical substance or financial nature.

When it comes to tax season, the IRS requires reporting real and financial assets together as tangible assets.

As mentioned, financial assets are generally the most liquid among the three. For example, bank deposits and stocks can be converted to cash within a week in most cases, while real estate and equipment must be listed before they can be sold.

Another thing that generally distinguishes financial assets is how their value is derived. Real assets have some level of intrinsic value based on their nature as a physical asset. Intangible assets are usually recorded at cost. Therefore, the value of financial assets can vary based on the supply and demand in the market in which they are traded.

Source: https://www.thebalancemoney.com/what-is-a-financial-asset-5198812

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