Why do we segregate assets into financial and non-financial assets?

Assets can be classified as Financial or Non-financial assets. One might wonder why this is necessary.  Let us dive into this concept, beginning with understanding what financial and non-financial assets are and why they are classified as such.

What are Assets?

Assets are things that have a monetary value and are beneficial for a business. Assets are commonly classified as tangible, intangible, current, fixed, financial, non-financial, etc.

Plant and machinery, land, buildings, cash, bank balance, patents, etc are some of the examples of assets that a business has.

What are Financial Assets?

Financial assets are the things of value that are held by a person for their underlying value. They are intangible and do not have a physical form. For example – Stocks, bonds, debentures, options, futures, etc.

The value of these assets may change over time depending upon the market conditions, changes in government policies, fluctuations in interest rates, etc.

In comparison to non-financial or physical assets, financial assets are more liquid as they can be traded and can be converted into cash.

What are Non-financial assets?

Non-financial assets are tangible or intangible assets that have a value but cannot be easily converted into cash. They are not as liquid and generally not traded.

Examples of such assets are buildings, plant and machinery, patents, trademarks, etc.

Difference between Financial and Non – Financial Asset

From the above discussion, it is clear that financial and non-financial assets are very different. The following are several important reasons why it is important to segregate the same:

1. It helps in the proper classification of assets on the Financial Statements.
2. It helps in liquidity management.
3. It helps in Risk assessment.
4. Tax management can be done accurately.