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Key Differences Between Tangible And Intangible Assets

16 Aug 2023

Introduction:

In account books, an asset can be defined as a resource that has value and can provide economic benefits to its owner in the future. Thus, anything you currently own with a definite value can be termed an asset. It can be professional or personal.

Personal assets include your car, property, jewelry, shares, mutual funds, fixed deposits, bonds, etc. Whereas your professional assets are your business equipment, inventory, brand name, etc.

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Assets can also be classified as tangible and intangible assets based on their physical existence, nature, and life expectancy. In this article, we are going to discuss the differences between tangible and intangible assets, their examples, uses, and benefits. Continue reading.

What are tangible assets?

Tangible means something that can be clearly seen. So, assets with a physical presence that can be touched or seen can be classified as tangible assets. This is the primary point of distinction that separates tangible assets from intangible assets. 

Tangible assets can be further classified into current assets and fixed assets:

  • Current assets

Current assets are also known as movable assets. These are the items that come with an expiry date and hence, are generally utilized within a few days, months, or even years. In the event of an emergency, current assets can be quickly liquidated into cash. Current assets include raw materials, finished goods, food items, clothes, etc.

  • Fixed assets

Those tangible assets intended for long-term use are known as fixed assets. That is why these assets are also called immovable assets. They are mentioned as long-term assets in the balance sheet. Examples of fixed assets include land, building, plant, property, machinery, furniture, and stocks.

What are intangible assets?

Intangible assets are the opposite of tangible assets. These assets do not exist physically but only on the balance sheet of a company or an individual. Intangible assets can further be classified as definite and indefinite assets. 

Intangible assets that stay with a company or an individual indefinitely can be classified as definite assets. On the other hand, assets that are valid only until an agreement between a third party and the owner with no definite mention of perpetuity are known as indefinite assets.

Some common examples of intangible assets include brand recognition, trademark, copyright, logo, patent, goodwill, etc. Here, a company’s brand name is an indefinite asset as it remains the same throughout its existence. In contrast, the patent is a tangible asset as it will expire on the expiry of the patent term.

How to calculate the values of tangible and intangible assets?

Calculating the value of tangible assets is easy compared to intangible assets. These assets exist in reality and can be inspected and analyzed. The value of current tangible assets can be recorded in the income statement and the balance sheet. For example, the cost of inventory and stocks are entered as ‘expenses’ under the cost of production of goods.

On the other hand, the value of intangible assets can be estimated but cannot be calculated accurately. It’s because these assets do not exist physically, and hence, have no definite value. For example, copyright is essential for a company but has no calculative monetary value.

One key point to note here is that while the values of tangible assets depreciate, intangible assets are amortized.

What are the uses of tangible and intangible assets?

Tangible assets are useful in conducting day-to-day business activities. They determine the worth of a company or an individual. The more tangible assets a company has, its overall net worth will be higher. Additionally, tangible assets can be used as collateral to secure financing for business or personal requirements. 

On the other hand, intangible assets are used to create an identity or brand. Since they have no physical value, they cannot be used to get loans or financing during an emergency.

To sum it up

In today’s world, where being quick and competitive is vital for any business, both tangible and intangible assets are critical. While a company’s tangible assets help them in day-to-day operations and determine its net worth, intangible assets are helpful in creating brand value and recognition. Although intangible assets do not have physical existence like tangible assets, they are still recorded on the owner’s account books appropriately.

 

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