Assets are properties or economic resources that a commercial entity owns, controls and uses in the course of carrying out its operations. All forms of business including corporations, firms, partnerships and sole proprietorships essentially own some assets depending on the nature of their activities.
In accounting and finance, assets are categorized into different types. For example, they are categorized as current and noncurrent assets, operating and nonoperating assets, cash and noncash assets, monetary and nonmonetary assets and tangible and intangible assets.
The article “tangible vs intangible assets” focuses on the last of the above mentioned categories i.e., defines tangible and intangible assets and explains the difference between two.
Definitions and meanings:
Business assets that are present in their physical form are known as a tangible asset. They are the main assets that entities actively use to produce their goods and services and can be either current or non current. Tangible assets are considered as the backbone of an entity’s core operations
Examples of current tangible assets include inventory, check, pay order, short term investments, cash, bank balances, prepayments, receivables etc. and examples of non-current or fixed tangible assets include property, plant, building, machinery, equipment, land, vehicles etc.
Intangible assets can be defined as assets that do not have a physical existence. These are non-monetary assets that are separately identifiable. Patent, royalty, goodwill of a business, licenses, trademark, clientele lists etc. are some popular examples of intangible assets.
For any business, the intangible assets usually have a long-term value as compared to tangible assets.
Difference between tangible and intangible assets:
The main points of difference between tangible and intangible assets are given below:
Tangible assets are physical assets that can be touched, felt and seen because they have a physical existence but intangible assets do not have a physical existence and, therefore, cannot be felt, touched or seen.
Tangible assets are recognized when owned and controlled by a business entity. A tangible asset can be constructed by the entity itself or acquired by buying, transferring or leasing when most of the economic life of the asset is owned by the business.
Intangible assets are recognized when it is probable that economic inflow of benefits will result to the business and cost of the intangible assets can be measured reliably. Intangible assets are either internally generated or they are acquired in result of a contractual or legal agreement with another party. Internally generated intangible asset having infinite life, such as goodwill, don’t appear on company’s balance sheet.
3. Cost measurement:
The measurement of cost of a tangible asset is easier than the measurement of cost of an intangible asset. The basic idea in considering the cost of a tangible asset is to accumulate all the costs incurred to construct or buy and bringing the asset to its working condition. The components considered while measuring the cost of a tangible asset are purchase cost, delivery, handling, installation and estimated cost of dismantling the asset at the end of its useful life (if any).
However, cost of intangible assets is difficult to identify practically because an intangible asset does not have physical components attached to it rather it usually is a result of research and development. If it is a purchased intangible asset with definite life span, the purchase price is allocated as the cost of the intangible asset.
4. Economic life:
Tangible assets are prone to physical wear and tear. They also have an economic life which depreciates as time or economic value of asset passes which is systematically decreased from the carrying value of asset.
Intangible assets do not necessarily have a definite life and can have an indefinite life based on the type of asset. Intangible assets are either amortized or tested for an impairment test usually when a considerable amount of decline is deemed to occur which can make its carrying value less than its remaining useful value.
5. Other financial uses:
Tangible assets can be pledged as collateral in relation to raise a loan or lease agreement. Intangible assets, on the other hand, cannot be pledged as collateral because these assets do not have any physical existence and it is difficult to label a reliable price to them.
Conclusion – tangible vs intangible assets:
Almost every business owns some tangible assets because they are highly vital to start and run business operations. Intangible assets are either acquired in a business contract or are internally generated by a business. Intangible assets add value to a business and improve its future prospects in terms of revenues and growth. So, both types of assets have an impact on the functioning and activities of a business. The importance of a tangible or an intangible asset also depends upon the type of business carried on by the entity. Where for a textile brand intangible asset like brand name will be more necessary, for a business selling buildings, tangible assets like buildings as inventory will have more worth.