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What is a Physical Asset?
Mary McMahon
Mary McMahon
A physical asset, also known as a tangible asset, is an object which has value. Physical assets are tangible things which are either valuable in themselves, or which produce value for the owner. This is different from intangible assets, which have value but do not have a physical presence. An example of a physical asset is a car; it is a physical object which can be touched and which has a clear value. An intangible asset is something like a patent, which protects intellectual property and therefore helps to generate profits, but cannot be physically handled.
For accounting purposes, physical assets are considered part of the value of a business. Over time, a physical asset declines in value, and this may be counted as a tax deduction. If a business needs to be liquidated, the physical assets can be sold to raise funds quickly for the purpose of paying creditors. Intangible assets are sometimes easy to sell, such as when a company holds stock in another, while in other cases they can be challenging to value and sell; patents are an example of something which can be tricky to value fairly.
Inventory, real estate, equipment, and cash are all examples of physical assets. They are considered part of the overall value of the business, and must be documented on financial declarations and in account books. When businesses sell or merge, part of the process involves a fair valuation of the business, which includes a determination of the value of all physical assets held by the business. Businesses which go into default must also be valued for the purpose of determining how much money can be recovered for creditors from a physical asset auction.
Physical assets like equipment depreciate, or decline in value, over their lifetimes. This occurs as a result of wear and tear, and also as assets become obsolete; a physical asset like a computer, for example, will quickly be outstripped by the next generation of products. Depreciation is considered a loss for the business and is declared as such on tax documents and other business paperwork. Eventually, depreciated assets need to be replaced, which constitutes another expense for the business. Maintenance of physical assets is another type of asset-related expense which businesses can incur.
Some businesses may have relatively few physical assets. A company which offers a service, such as consulting, may only have assets like office equipment which are used in the company's work. Other companies, such as manufacturers, can have substantial physical assets in the form of real estate, factories, equipment used in manufacturing, and so forth.
Mary McMahon
Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a SmartCapitalMind researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.
Learn more...
Mary McMahon
Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a SmartCapitalMind researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.
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![Cash is one type of physical asset.]()
By: Denis GladkiyCash is one type of physical asset. -
![For accounting purposes, physical assets are considered part of the value of a business.]()
By: DragonImagesFor accounting purposes, physical assets are considered part of the value of a business. -
![Inventory is an example of a company's physical asset.]()
By: evok20Inventory is an example of a company's physical asset.
Discussion Comments
I think most people realize when they buy electronic equipment and gadgets that they will quickly decline in value and become obsolete in a few years.
I mostly use a home computer to read email and surf the web. Because of this, I never want to spend the money on an expensive computer.
My thinking is, I would rather have a cheaper computer and replace it every couple of years with a new one.
Anytime I have tried to sell used technology equipment like that, I always wonder if it is even worth the hassle. They decline so fast in value with new models coming out all the time, that you never get much money back.
I remember reading a book about improving your finances and they talked a lot about the depreciation of physical assets.
The author encouraged you to really stop and think about the amount of money you spent on physical assets that quickly declined in value, like a new car.
As far as physical assets are concerned, owning a home and land are two physical assets that usually increase in value instead of decline.
That must be one reason why my dad always bought used cars instead of new ones. He would buy a car that was only a year or so old and still in good condition.
He said it would not depreciate as fast as a new one, and felt like he was getting more for his money. He was very wise when it came to property asset management and I have learned a lot of valuable lessons from him.
My husband has his own construction business and there is quite a bit of record keeping that goes along with that.
Anytime he buys or sells a piece of equipment, you have to keep track of the depreciation of it. Even when he trades in an old truck for a newer one, all of that must be tracked for tax purposes.
He also keeps track of the physical assets he uses for his office area. He maintains a completely separate office area for his business.
This makes it much easier from a tax standpoint than it would be if he combined it with his home computer and office equipment.
I keep the books for him, so I am the one who is responsible for the physical asset tracking of his business equipment.
It seems like there is more paperwork required all the time, but keeping track of physical assets is not usually complicated - just time consuming.
I have an elderly aunt and uncle who have had a booth at an inside flea market for many years. They are now ready retire and in the process of selling their business.
Once they began doing a physical inventory of their fixed assets, they realized they had more assets than they thought. This also made their business more valuable than they initially thought as well.
All of these physical assets were of value and were figured into the cost of the business.
I think it is easy for most people to actually have more assets than they realize.
It is easy for physical assets to pile up and become obsolete and we think of them as not worth anything. Even though their value may have declined, there is still a price attached to them.
Once you start adding all of it up, there is more there than you thought there was.
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