Introduction
A resource having economic worth that an individual, business, or the government possesses or administers with the possibility of future gain is referred to as an asset. It is the key business necessity that the organization requires to perform properly. It symbolizes a company's current capacity or connection that other people or businesses do not have. Whether it's manufacturing technology or a patent, an asset may be looked at as anything that can create an income stream, cut expenditures, or increase profit in the future. Assets can be broadly divided into current and non-current assets. Non-current assets can again be divided into tangible and intangible assets. Tangible assets are those that can be seen or touched because they are physically or practically existent. Money, merchandise, cars, machinery, buildings etc. are among them. Whereas, intangible assets are those which do not exists in physical form. They are abstract and cannot be seen or touched. For instance: patents and goodwill, prepaid expenses etc.
Tangible Assets vs Intangible Assets
The key difference between tangible and intangible assets is that a tangible asset is something that can be physically touched, seen or felt. On the other hand, an intangible asset is something that possesses abstract qualities. They cannot be physically touched or seen but can only be experienced or felt. They do not have any physical existence. Although there is variation in liquidity in financial terms, however, tangible assets are very important in helping determine the organization’s value or worth. They are easily transferrable. But, intangible assets, though they do not possess any physical existence, they have long term value in business terms. Intangible assets can be used by any company or firm to help them buy tangible resources like machinery or equipment. The reputation or the value of any organization or business company is weighed in terms of intangible assets.
Difference Between Tangible and Intangible Assets in Tabular Form
| Parameters of Comparision | Tangible Assets | Intangible Assets | |
| Meaning | Tangible assets are those which have a physical form. They can be seen or touched. They also have a definite form and a fixed monetary value. | Intangible assets are those which do not have a physical form. They cannot be seen or touched. They can only be felt or experienced. Intangible assets do not pertain to having a fixed form and fixed monetary value. | |
| Quality | They are easier to sell to raise money or cash values. | They cannot be sold since their value can only be perceived. They cannot be sold for raising the value of money. | |
| Flexibility | Liquid. | They are not liquid. | |
| Value | Tangible assets determine the company’s current or present value. | Intangible assets only increase the organization’s long-term value. | |
| Durability | They can be destroyed by any natural calamities like flood, fire, storm etc. due to their physical presence. | They cannot be destroyed by any natural calamities and remain unaffected since they do not have any physical presence. | |
| Insurance | They need general business or liability insurance for their safety. | They may need specialized insurance in extreme cases since poor decision making can lead to their destruction. | |
| Service | Tangible assets have residual value. | Intangible assets do not possess any residual worth. | |
| Examples | Land, vehicles, machinery, furniture, bonds, etc. | Client relationship, company’s reputation, licensing experiment, patent, domain etc. | |
What are Tangible Assets?
A company's net value and key activities are heavily reliant on its assets. Tangible assets are the long-term raw materials controlled by the firm that has monetary worth. Corporations buy such resources in the ability to execute their businesses effectively, not for the aim of reselling them. It contains machines and technology, equipment and supplies, furniture and fixtures, a residence, automobiles, farmland, internet, and construction, among other things. In most sectors, they are the primary type of asset. They are also frequently the simplest to comprehend and appreciate. Tangible assets have a limited or definite significance and, in most cases, a physical shape. In general, tangible goods can always be exchanged for money. Tangible assets have an operational worth as opposed to an intangible calculation.
Tangible assets have an intrinsic life span after which they become outdated. Degradation is a mechanism used by businesses to distribute the cost of an item throughout its economic structure. The accounting information is dominated by physical assets. The majority of industries rely substantially on these assets. Secondly, the valuation of these resources is typically straightforward. These properties aid in the production and delivery of goods and services, hence leading to the improvement of the working capital of the firm. Furthermore, corporations can trade these products for revenue to raise capital during catastrophes or economic meltdowns. Moreover, they can leverage these tangible assets as an investment to secure loans from creditors.
Types of Tangible Assets
There are mainly two types of tangible assets. They are as follows
Current Assets
Current assets are that type of tangible assets which represents all the physical resources of the company or the firm which are expected to be consumed, sold or used by the process of business operation within a year. These types of assets are necessary for the organization because they are used to fund day to day operations that are undertaken by the business company to pay for the continuous expenditure. Current assets may or may not have a substantial form on-site, but they will have a purchase price. Money, marketable securities, preferred stock, and deferred revenue are examples of a company's most accessible, tangible cash flow. All of these physical assets are taken into account when calculating a corporation's liquidity position. The computation of an organization's corporate ratio includes other retained earnings. The current ratio compares a corporation's ability to cover its current commitments with its marketable securities. Depending upon the nature of the products that the manufacturing firm sells, current assets can range from barrels of oil and fabricated goods to foreign exchanges. However, care should be taken to include only the qualifying assets that are capable of being liquidated at a fair price over the next one-year period. The basic components of the current assets are:
- Inventory
- Prepaid expenses
- Accounts receivable
- Marketable securities
- Cash or cash equivalents
Long-Term Assets
Long-term assets, also known as fixed assets, are acquisitions in a firm that will benefit it for many generations. Long-term assets are an essential element of budget allocations in many sectors. Long-term use and maintenance of these resources can also give financial advantages to businesses. They are frequently used for several centuries. This separates them from current assets, which are generally used within one year by businesses. These fixed assets are also regarded as illiquid assets since they are more difficult to transfer to currency than current assets. As with most types of assets, long-term assets get destroyed over a course of time after their successful utilization. This is because fixed assets are not engaged to generate value or worth for an infinite period. After a certain time, it is bound to deplete or get diminished. For instance, in any automobile manufacturing firm, the machinery and the equipment used would automatically get deleted after a certain amount of time. It is a non-cash expense that increases net income but also helps to match revenues with expenses in the period in which they are incurred. Long-term assets can also be very costly and hence require huge capitals which can lead to the depletion of any company’s cash or might increase its debt. Investors should examine an organization's ultimate assets holistically, just as they would with any other long-term profitability. When doing a fiscal study of a firm, it is essential to use several financial ratios and indicators. The basic components of long-term assets are:
- Goodwill
- Trademarks
- Clients
- Patents
- Bonds
- Real estate
- Stock
- Fixed assets like property, land, building, vehicle etc.
What are Intangible Assets?
Intangible assets are those which do not have physical value. They are the resources that can be used for a longer period. They are owned by a company that has commercial value. The intangible assets of a company are not recorded on the balance sheet and therefore they do not possess any book value. As a result, when a firm is bought, the sales price is frequently greater than the written value of its assets. In the finance sheet of the firm that acquired it, the principal amount is represented as an intangible asset. Intangible assets can be created or acquired by businesses. For instance, a corporation may establish a trademark or construct a customer distribution list. If the corporate generates an intangible asset, then it can deduct the charges of the procedure, such as submitting the statement of claim, employing a consultant, and other relevant charges. Although an intangible asset doesn't have the same clear physical significance as manufacturing or a piece of technology, it may still be a big component of a company's ultimate performance. These types of assets can also be amortized, which means that they can spread the cost of an intangible asset over a specific period.
Types of Intangible Assets
There are two principal types of intangible assets. They are as follows
- Definite asset: An agreement for using some other industry's technology, with no intentions to renew the term, would be a definite intangible asset. As a consequence, the agreement has a predetermined lifespan and is regarded as a definite asset.
- Indefinite asset: it is something that stays with the company or the firm as long as it exists. Since it remains for an indefinite period, therefore it got its name from this. For instance: the name of any firm or brand is regarded as an indefinite intangible asset since it remains with the firm for the duration of its existence.
The other types of intangible assets are:
- Licensing: it is something that has the legal method or follows the right way to conduct business-related activities to earn money. A license may also be used to purchase or to make sales operational.
- Brand equity: it means the valuing of any brand and helping it to enable sales along with earning profit for the company. Businesses that seem to have favourable brand equity may be prepared to pay higher prices for a company's business, even if they can acquire the very same thing from an opponent for much less.
- Databases of customers: Customer databases, like email newsletters, are a significant intangible asset since they may help firms generate or maintain revenues. One may utilize a list of consumers who have previously purchased in their marketing and advertising initiatives.
- Goodwill: When one firm buys another, the intangible asset known as goodwill is created. A goodwill commodity is anything like the worth of an industry's names and logos, customer satisfaction, or even strong employee engagement.
- Intellectual property: Brand associations, licenses, inventions, partnerships, ideas, writings, and proprietary information are some instances of intellectual properties that are important for the organization and its goods or services. Another sort of intellectual property is research and development, popularly known as R&D, which occurs when a corporation researches to generate a novel service or product.
Main Differences Between Tangible Assets and Intangible Assets In Points
The differences between tangible and intangible assets are described below
- Tangible assets are those which have a physical form and value. On the other hand, intangible assets do not possess any physical form. They cannot be seen or touched but can be felt.
- The tangible assets are temporary and they can get destroyed in any natural calamity such as a flood, storm etc. On the other hand, intangible assets are non-destructible and they remain intact during any natural calamity.
- Tangible assets are mentioned in the balance sheet and therefore they have book value. Whereas, intangible assets are not reported on the balance sheets and therefore they do not have any book value.
- Tangible assets are flexible and intangible assets are not flexible.
- Residual values are possessed by tangible assets. On the other hand, intangible assets do not have any residual values.
Conclusion
Thus, from the above discussion, it is seen that for a company to survive and climb the ladder in any business economy, both tangible and intangible assets are necessary. The tangible assets help in the production of various products and services which in a way determine if it can survive in the competitive economy. On the other hand, intangible assets help the company in creating products and services that would assist them in the times to come.
References
- https://www.businessinsider.in/investment/news/understanding-intangible-assets-and-how-they-generate-value-for-investors-and-businesses/articleshow/87806060.cms
- https://www.wallstreetmojo.com/tangible-assets/