Financial Environment and Financial Assets: Real Assets and Financial Assets
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Financial Environment
A financial environment is a part of an economy with the major players being firms, investors, and markets.
Basically, this sector can represent a large part of a well-developed economy.
An individual who has ability to grow his capital or business organization that offers goods or services to consumers is the part of this sector.
Investors are individuals or businesses that place capital into businesses for financial returns.
Markets represent the financial environment that makes this all possible.
There were very small organizations in financial markets in old times.
Large number of firms was not possible until markets became more mature.
The mature markets allow for more access to resources necessary to produce goods and services.
As firms begin to grow, expand and multiply, higher capital is required for continuity and success.
Many times individual investor who has more capital than necessary, he spends on living standard.
Excess capital should be invested into a firm to take return.
The excess amounts than required capital and working capital should be invested.
The person or organization who invests money is known investor.
This relationship in the financial environment allows both parties (lenders and borrowers) to increase their capital.
Different factors play a role for individuals making investments.
A few of these may include risk, current market conditions and competition.
The last player in the financial environment is the market.
Markets represent any place where sellers and buyers can meet together and exchange items.
In most cases, the exchange is capital for goods or services.
Markets may be local, regional, national or international, depending on the economy.
A financial environment can exist anywhere so long as the major players exist in the economy.
Newer markets have fewer resources and lower levels of economic activity due to lack of resources.
The financial environment is also subject to the business cycle, which dictates the stages of growth and decline in the economy.
For example, when a new financial market or environment receives large resources, it has the ability to grow and expand.
Decline occurs when the market is saturated with goods and services due to a lack of demand.
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Click on link for YouTube videos of Class 11: |
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Accounting Equation |
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Basic Journal Entries in Nepali |
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Basic Journal Entries |
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Journal Entry and Ledger |
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Ledger |
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Subsidiary Book |
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Cash Book |
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Trial Balance & Adjusted Trial Balance |
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Bank Reconciliation Statement (BRS) |
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Depreciation |
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Final Account: Class 11 |
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Adjustment In Final Account |
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Capital and Revenue |
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Single Entry System |
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Non-Profit Organization (Non-Trading Concern) |
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Government Accounting |
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Goswara Voucher (Journal Voucher) |
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Real Assets
Before starting financial assets, we should know about real assets.
Real assets are tangible or physical assets; they can be seen and touched.
They must have monetary value; these assets can be purchased or sold.
There are different types of real assets.
They are land, building, houses, cars, computers, machinery, equipment, furniture, stocks, cash, gold, silver etc.
They are used to generate income.
In other words, real assets help to increase income for organization.
Plant and machinery are used in manufacturing process.
They are destroyed only by accident and/or due to wear-and-tear over the time.
They are depreciable except land and gold.
They are less marketable; we cannot sell real assets whenever we need.
Real assets are shown in assets side of balance sheet.
Financial Assets
Financial assets are not existed in physical form.
These assets represent the ownership right in a piece of paper.
Investing in financial assets can yield dividends and interest income (from investors’ point of view).
Financial assets help to increase capital of an organization (from borrowers’ point of view).
In other words, using financial assets an organization can increase its production and expand its market.
Some examples of financial assets are common or ordinary shares, preference shares, bonds (debentures), certificates of deposit, bank balances, annuities and mutual funds.
Financial assets are much easier to trade and manage than real assets.
Financial markets make valuation of financial securities.
Financial assets are not depreciable.
They are shown in assets (investment is securities) as well as liabilities (securities issued to raise fund) side of balance sheet.
Financial assets arise in the process of borrowing and lending money and represent a claim against future earnings.
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Definition |
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According to Michele CE and EF Brigham, “Financial assets are piece of paper with contractual provision that entitle their owner to specific right and claim on real assets.” |
Characteristics of Financial Assets
The main characteristics of financial assets are given below:
No physical existence
Financial assets do not have physical existence.
They represent the ownership right through a piece of paper.
It is also known certificate of ownership.
If you purchase shares of any limited company, share certificate is the evidence of ownership.
More liquid
Financial assets are more liquid than physical assets.
They can be easily converted into cash by selling in secondary market.
No production capacity
Financial assets do not have productive capacity of their own.
They generate income by investing in real assets.
Easily moveable
Financial assets can be easily carried from one place to another place.
They are ownership certificates. Ownership can be easily transferred.
Assets and liabilities
Financial assets are asset for one party and liabilities for another.
The shares are assets for you (buyer) and liabilities for issuing company.
Differences between Financial Assets and Real Assets
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Bases |
Real assets |
Financial assets |
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Productive capacity |
Real assets have own productive capacity. |
Financial assets do not have own productive capacity. |
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Liquidity |
They are less liquid and available in traditional markets. |
They are more liquid and traded through stock exchanges. |
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Place in B/S |
They are shown in assets side of balance sheet. |
They are shown in assets as well as in liabilities side of balance sheet. |
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Movement
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They are difficult to move from one place to another place. |
They are easy to move from one place to another place. |
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Depreciation |
Real assets are depreciable. |
Financial assets are non-depreciable. |
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Click on link for YouTube videos |
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Share (Accounting for Share) |
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Share in Nepali |
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Debentures |
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Final Account: Class 12 |
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Final Account in Nepali |
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Work Sheet |
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Ratio Analysis (Accounting Ratio) |
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Fund Flow Statement |
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Cash Flow Statement |
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Theory Accounting Xii |
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Theory: Cost Accounting |
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Cost Accounting |
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LIFO−FIFO |
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Cost Sheet, Unit Costing |
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Cost Reconciliation Statement |
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Instruments of Financial Assets
Financial instruments are easily tradable packages of capital.
They represent legal agreement and monetary value.
Financial instruments can be classified into:
On the basis of maturity period
On the basis of ownership
On the basis of return
On the basis of issuer
(A) ON THE BASIS OF MATURITY PERIOD
Financial assets (instruments) can be divided into two parts on the basis of maturity period.
They are long-term and short term.
Long-term securities
The financial securities which have maturity period more than one year are known as long-term instruments. They are common stock, preferred stock, bond etc.
Short-term securities
The financial securities which have maturity period less than one year are known as short term instruments. They are commercial paper, treasury bills, banker’s acceptance etc.
(B) ON THE BASIS OF OWNERSHIP
Financial assets (instruments) can be divided into two parts on the basis of ownership.
They are ownership financial instruments and creditor ship financial instruments.
Creditorship securities
Those financial assets that make the holders creditors of the company are known as creditor ship financial instruments.
They are debentures, commercial papers etc.
Ownership securities
Those financial instruments which represent the ownership right are known ownership financial instruments.
They are common stock, preferred stock, mutual fund etc.
(C) ON THE BASIS OF RETURN
Financial assets (instruments) can be divided into two parts on the basis of return generated by them.
They are fixed return financial instruments and variable return financial instruments.
Fixed return securities
The financial instruments which have fixed rate of return are known as fixed return financial instruments.
They are preferred stock, bond, commercial paper etc.
Variable return securities
The financial instruments which do not have fixed rate of return are known variable return financial instruments.
Common stocks, floating rate notes and income bonds are the examples of variable return securities.
(D) ON THE BASIS OF ISSUER
Financial assets (instruments) can be divided into two parts on the basis of issuer.
They are corporate financial instruments and government financial instruments.
Corporate securities
The financial instruments which are issued by corporate sectors (companies) are known as corporate financial instruments.
They are common stocks, preferred stock, corporate bonds, commercial papers etc.
Government securities
The financial instruments which are issued by government are known as government financial instruments.
They are government bonds, treasury bills, development bonds, municipality bonds etc.
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