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Understanding Tangible and Intangible Assets: Definitions and Examples
Tangible assets can be defined as object that are physically present in this world while intangible assets don’t exist in real life. Both of these types of assets can be owned by a business and both of these have monetary value as well.
Key Traits
Tangible assets are the main items that a company uses to produce its products and services.
Intangible assets are items that do have a financial value just because they are considered to be a potential revenue asset. A basic example of intangible asset is a company’s name, copyrights, etc.
Understanding Tangible and Intangible Assets
There is more to these two types of assets than meets the eye. Let’s take a comprehensive look at tangible and intangible assets:
Tangible Assets
Tangible assets are physical assets that are measured by a business’s operations. Examples of these assets include property and physical resources like equipment. Tangible assets are considered to be the foundation of a firm’s business as they provide the basis on which a company can develop and produce its goods and services. It is also important to note that tangible assets are prone to be damaged by natural disasters. Some more examples of tangible assets include land, vehicles, machinery, equipment, inventory, etc.
Diving even deeper, there are two main types of tangible assets: current assets and fixed assets.
Types of tangible assets
Current Assets
Current assets incorporate things like cash, marketable assets, inventories. These items can be sold directly for raising cash in emergency situations. They are also normally used with in a span of 1 year. The concept of a current asset contemplates that its financial advantage can be gained within a period of 12 months.
Fixed Assets
Fixed assets are outdated assets that are utilized by a business for its operations for more than 12 months. These types of physical assets are normally mentioned on a balance sheet. Examples of these types of assets include: equipment, property, office, furniture, etc. This includes the money a business makes by using tangible assets, which are usually recorded on the income statement as revenue. Fixed assets are normally important in running a business on a consistent basis. These assets keep running the business operations.
Companies that incorporate tangible assets better
The first type is the manufacturing industry. These companies are used in generating goods therefore there assets are tangible assets. Examples of these companies include automobile and steel industries. In this regard, the tangible assets would be the industry equipment, computers and industry offices as well.
Apart from this, companies that deal with technological products like the selling of products or services related to smart phones, computers, etc are also included in companies that incorporate tangible assets.
Lastly, the an oil rigs company or another company in this domain is also a type of tangible assets.
Intangible assets
Intangible assets are utilized longer than tangible assets. It is difficult to provide a designated value to these assets due to the uncertainty of their future monetary benefits. These assets add significant value to a business’s revenue and are a lot more valuable than tangible assets, which lose value over time. Intangible assets are firstly collected on the balance sheet of a business to assist investors, creditors, and bank organizations in evaluating the value of a business. As discussed earlier, these assets are intangible property that includes:
Patents which are considered as the property rights of an investors. It also includes trademarks which are recognized as a phrase or tag line that resembles the service or mission of a business. They can also be a brand name.
There are also franchises that which provides you a type of licenses to use the brand’s names and sell their goods and services.
The goodwill depicts the value of a firm that is more than a company’s targeted assets. These are payed by other companies when buying the focused company.
Lastly, copyrights exist as the intellectual property of firms that are safeguarded from being used by other non-authorized individuals.
These types of assets may also incorporate things like internet domains, licensing agreements of physical properties, etc.
Difference between tangible and intangible assets in terms of Accounting
When it comes to accounting, tangible assets are far easier to account for as they have a life span. Therefore, tangible assets are normally organized on the balance sheet firstly. When they are consumed, the expense in their usage is incorporated in the income statement.
For instance: When a tangible assets is consumed, it is counted in the costs of goods sold for a business. This cost of goods sold depicts the costs normally involved in the production of a good. Furthermore, tangible assets like equipment are also present on the balance sheet as they have a lifespan as well. These when consumed are counted as expenses on the income statement and termed as depreciation.
Intangible assets are far more tricky when it comes to accounting. To explain this, intangible assets have a starting purchase cost like a license or patent. Just like tangible assets these are also portrayed on the balance sheets and termed as long term assets.
The total price of intangible assets is allocated over some years, during which the asset produces value for a company over its used life. Tangible assets are depreciated, whereas intangible assets are amortized. Amortization is a concept in which the price of an asset is expensed on the income statement each passing year.
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