Definition, Types and Examples of Financial Assets

If you’re curious about what are financial assets; you’ve come to the right place. Financial assets are essential to understanding how money works in personal finance and business. 

Whether you’re an investor looking to grow your wealth, a student learning the basics of finance, or someone trying to make sense of the financial world, it’s important to get familiar with these concepts.

In this blog, we’ll explain financial assets, explore the different types, and explain how financial assets are classified on the balance sheet and how their value is measured. By the end of this blog, you’ll have a solid grasp of financial assets and why they matter in your personal and professional financial journey. 

Let’s get started!

What is a Financial Asset?

A financial asset is an asset that holds monetary value and can be easily converted into cash or can be used to generate income. It represents a legal claim to future financial benefits, like cash flows or ownership stakes.

Now that we’ve clarified what financial assets are, let’s go deeper into the specific types that fall under this umbrella.

Types of Financial Assets

Financial assets come in different forms, each serving specific investment needs and offering varying risks and returns. Here are the main types of examples you should know about:

With a clear understanding of the different types of financial assets, let’s explore how these assets are classified on the balance sheet.

Financial Assets Classification on the Balance Sheet

When you look at a company’s balance sheet, you’ll see financial assets grouped in different categories. Understanding these classifications helps you assess the company's financial health and how easily it can turn its assets into cash. Here is a detailed look:

1. Current Assets

These are assets that the company expects to convert into cash or use up within a year. Some examples include:

• Accounts Receivable: Customers owe the company money for goods or services they’ve received on credit.

• Inventory: This includes the products the company plans to sell or raw materials for making products.

2. Non-Current Assets

These assets will provide value to the company for more than one year. They include:

• Investments: Long-term investments in other companies, stocks, or bonds, which the company doesn’t plan to sell anytime soon.

• Property, Plant, and Equipment (PPE): Physical assets like buildings, machinery, and land used for operations.

• Intangible Assets: Non-physical assets like patents, trademarks, or brand value that still have financial worth.

3. Financial Instruments

Financial assets can also be classified based on the type of financial instrument they represent. These include:

• Equity Securities: Stocks or shares in other companies that show ownership.

• Debt Securities: Bonds or debentures representing loans to businesses or governments.

Now that we’ve covered how financial assets are classified on the balance sheet, let’s move on to understanding how these assets are measured.

Measurement of Financial Assets

Measuring financial assets correctly is important for making smart investment choices and managing your money effectively. You’ll clearly understand how financial assets are measured, with easy-to-follow examples to help you grasp the ideas better.

1. Initial Measurement

When you first acquire a financial asset, it is measured at fair value. Fair value is the price you would get if you sold the asset in a normal market transaction.
Let’s say you buy shares of a company for ₹1,000. The fair value at the time of purchase is ₹1,000. If you had to pay a broker fee of ₹50, the initial measurement would look like this:

• Fair Value: ₹1,000

• Transaction Costs (Broker Fee): ₹50

• Total Initial Measurement: ₹1,050

This ₹1,050 is what you’ve invested to acquire the asset, including any transaction costs.

2. Subsequent Measurement

After the initial measurement, financial assets are measured based on their category. Here are the three main types of measurement:

Amortized Cost

This is used for financial assets like loans or receivables you intend to hold until maturity, primarily to collect cash flows (like interest or principal payments).

Suppose you lend ₹10,000 to a friend at an interest rate of 5% per annum for three years. You expect regular interest payments and to get back your ₹10,000 after three years. Since you plan to hold this loan till it matures, it is measured at amortized cost.

• Initial Measurement: ₹10,000

• Subsequent Cash Flows: As your friend repays, you record the interest income and reduce the loan balance over time.

Fair Value Through Other Comprehensive Income (FVTOCI)

If you hold an asset to collect cash flows and sell it later, the asset is measured at FVTOCI. This applies to investments like government bonds, where you might hold the bond for a few years but also consider selling it if market conditions are favorable.

Let’s say you invest ₹50,000 in government bonds that pay annual interest. You plan to hold these bonds for a few years but may sell them if their value increases.

• Initial Measurement: ₹50,000

• If the fair value of the bonds increases to ₹55,000 due to market demand, the ₹5,000 gain is recorded in Other Comprehensive Income (OCI) until you sell the bonds. Only when you sell the asset will the gain be recognized in your profit or loss.

Fair Value Through Profit or Loss (FVTPL)

Assets classified as FVTPL are those you hold mainly for trading or to profit from short-term price movements. These assets are measured at fair value, and any changes in value are immediately recorded in your profit or loss.

Let’s say you buy shares of a tech startup for ₹20,000, planning to sell them quickly based on market price movements.

• Initial Measurement: ₹20,000

• If the share price increases to ₹25,000 and you sell them, the ₹5,000 profit is immediately recognized in your profit or loss statement.

Conclusion

Now that you understand what financial assets are, they play a crucial role in growing your wealth. Financial assets like stocks, bonds, and mutual funds can offer income and long-term growth opportunities. Knowing how they work helps you make better investment decisions.

The main benefit of financial assets is diversification. By spreading your money across different types of assets, you reduce the risk of losing everything if one investment doesn’t do well. A balanced mix of stocks, bonds, and other assets can help you manage risk while aiming for steady growth.

If you’re ready to start investing, Precize makes it easy. With a low minimum investment of just ₹10,000, you have the opportunity to diversify your portfolio. 

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