A balance sheet’s assets represent economic value and can be categorized into two main groups: intangible and tangible. A clear understanding of your business’s asset categories can provide significant advantages.
The foremost thing it contributes to is resource allocation and getting the right mix of assets, depicting the organization’s financial health. The asset portfolio decides on the business’s liquidity, value assessment, and risk management. The right combination of tangible and intangible assets facilitates risk aversion and opportunities for franchising or collaborations, taking advantage of patents or copyrights.
Understanding the difference between intangible and tangible assets can help you make informed decisions for your business. This will ultimately contribute to better fund management, strategic planning, and competitive advantage in a thriving market.
Read on to know what tangible and intangible assets are, the types, and the most suitable asset mix for your business.
What are Tangible Assets?
Tangible assets are physical, quantifiable assets used for business operations to generate revenue. Assets that you can see and touch, such as buildings, machinery, office equipment, vehicles, and inventories, are a few examples.
These assets are subject to depreciation, reflecting a decrease in their value due to obsolescence and wear and tear. Generally, tangible assets form part of the balance sheet.
Types of Tangible Assets
Fixed assets and current assets fall into the categories of tangible assets.
1. Fixed assets – Fixed assets, often termed long-term assets, are acquired by a business entity to utilize them in its operations for at least one year. Generally, there are no intentions to sell or resell these assets for cash conversion.
Property, Plant, and Equipment (PPE) are the most common types of fixed assets. In a car service shop, the property includes the place, the service area serves as the plant, and the tools and machinery represent the equipment.
2. Current assets – They are short-term assets, usually liquidated within a year by the organization. Also known as liquid assets, they can be easily converted into cash by selling them.
Current assets include cash and cash equivalents, inventory, marketable securities, and prepaid expenses. In the car service shop example, liquid assets encompass its bank account, cash on hand, receivable bills, and prepaid expenses.
What are Intangible Assets?
Intangible assets are non-physical assets that you cannot see or touch. It is difficult to ascertain their actual value because of the uncertainty of their future value. They usually include intellectual assets like patents, copyrights, goodwill, software, brand value, and franchise agreements.
Unlike tangible assets, intangible assets undergo amortization, gradually decreasing in value as they are used or expire. Intangible assets form a part of the balance sheet. It helps investors, bankers, and competitors. Creditors analyze the worthiness of the organization.
Types of Intangible Assets
There are two major types of intangible assets: identifiable intangible assets and unidentifiable intangible assets.
1. Identifiable intangible assets – These assets are easily separable or acquirable by the business. They can be sold and bought by an organization. This type of intangible asset is a long-term asset that stays for an indefinite period in the organization.
Patents, trademarks, copyrights, and software are some examples of intangible assets. This type of asset can exist independent of the business, like patents. A business may get its research and development for a product patented before registering the company.
2. Unidentifiable intangible assets – A business cannot separate or acquire these assets, meaning we cannot sell or buy them. Unidentifiable assets are non-quantified, but they enhance the organization’s value. They also have a limited or perpetual life; therefore, we cannot amortize them.
Goodwill, brand recognition, and client relationships are the most common examples of unidentifiable intangible assets. Goodwill is inseparable from its organization. Client relationships endure only as long as the organization maintains them, illustrating their uncertain lifespan.
What’s the Difference between Tangible and Intangible Assets?
Let’s recapitulate the differences between tangible and intangible assets and take a glance at the table below:
|Can be seen and touched
|Cannot be seen and touched
|Subject to depreciation
|Subject to amortization
|Value and accounting can be easily assessed
|Assessing their value and accounting is difficult
|Easy to liquidate
|Cannot be easily realized in cash
|Requires insurance as they can be easily damaged by fire, flood, or other unforeseen circumstances
|Requires special insurance and can be damaged by negligence
|Can be used as collateral against loans
|Cannot be used as collateral against loans and advances
Which Asset Type Is Better?
Tangible assets are essential for your business operations, serving the business both in the short and long term. Contrarily, intangible assets contribute to enhancing business value.
In a competitive market, the value of brand equity and client relationships is paramount. They empower us to outperform competitors, gaining a decisive advantage. This underscores intangible assets’ significant role in propelling the business to greater heights.
Choose intangible and tangible assets wisely based on business type, stage, and market. Neglecting intangibles can hinder value and credibility.
Managing Different Asset Types in Accounting
Understanding the difference between intangible and tangible assets requires knowledge of their financial statement accounting.
Tangible assets are easy to account for because of their computable value and predictable life span. Fixed assets depreciate over the years, reflecting a decrease in their value from daily use. An exception to this is property or land. The value of land increases over time. The balance sheet reflects their depreciated value as the cost decreases through amortization from the revenue account.
Current assets also form part of the balance sheet, exhibiting the business’s working capital. They represent the funds required for the business’s day-to-day operations and cover the organization’s current liabilities. The balance sheet depicts current assets at their actual cost or marketable value, depending on the type of asset. For instance, while cash and its equivalents are presented at actual cost, short-term investments are offered at marketable value.
The valuation of intangible assets is relatively tricky. If the organization acquires an intangible asset, the purchase price becomes the asset’s value. The International Financial Reporting Standards (IFRS) allow amortization of this value over the calculated lifespan of the asset.
Identifiable intangible assets form part of the balance sheet and shown at fair market value. Over the asset’s estimated life, you have to reduce a fixed amount year-by-year to show asset usage.
The values of unidentifiable intangible assets in a balance sheet can significantly impact its stakeholders, questioning the amount ascertained. This makes it necessary to meet the accounting standards and adhere to financial reporting rules and disclosures.
For further details on accounting and financial reporting, check out our blogs on the accounting sector.
An organization’s asset portfolio and management vary with its type and activities. Tangible assets are physically and easily valued, while intangible assets, which are non-physical and less liquid, have uncertain worth. Their presence on the balance sheet is vital for assessing an organization’s value, especially when seeking liquidity or loans.
Frequently Asked Questions
What are the main types of Intangible Assets?
The main types of intangible assets are patents, copyrights, goodwill, client relationships, brand equity, licensing, and franchising.