Definition
In finance, the term “tangible” refers to physical assets that have a physical presence and can be quantified, such as properties, vehicles, or machinery. On the other hand, “intangible” refers to non-physical assets that have value but are not physical in nature, like brand recognition, patents, or copyrights. Tangible assets can be physically touched and measured, while intangible assets, despite having value, cannot be seen or touched.
Key Takeaways
- Tangible assets are physical items that can be seen and touched, like buildings, plants, machinery, land, and inventory. They are characterized by their physical presence and are usually of significant value to a company as they can be used to produce goods, provide services, or can be sold to gain revenue.
- Intangible assets, on the other hand, are non-physical assets that are not visible or touchable. Examples include patents, copyrights, trademarks, business methodologies, goodwill, and brand reputation. Despite their lack of physical existence, they can significantly contribute towards a company’s long-term success.
- The main difference between tangible and intangible assets lies not only in their physical existence or lack thereof, but also in their depreciation method. Tangible assets typically depreciate over time, meaning their value decreases over their useful life. Intangible assets, however, can often appreciate or increase in value over time because they can provide a long-lasting competitive advantage.
Importance
The financial terms tangible and intangible are important because they help delineate the type of assets a company possesses and their respective values, which is crucial in understanding a company’s financial health. Tangible assets have a physical form and their value is typically more precise because they can be physically seen and valued based on physical characteristics.
Examples include machinery, buildings, vehicles, and cash. On the other hand, intangible assets lack a physical existence but hold immense value for a company.
Examples include intellectual property, brand reputation, patents, and trade secrets. Intangible assets can often be difficult to value accurately due to their non-physical nature, but they can significantly contribute to a company’s long-term success.
Understanding the difference between tangible and intangible assets is vital for investors in their decision-making process and for companies in their strategic planning and reporting.
Explanation
Tangible and intangible assets are financial terms that hold significant relevance for individuals, corporations, and investors, primarily for valuation, financial planning, and investment analysis. The primary purpose of distinguishing these assets is to establish a comprehensive picture of a company’s financial standing, facilitate due diligence, and guide investment decisions. Tangible assets are integral to a company’s operation and revenue generation.
They form part of the valuation during mergers, acquisitions, or liquidation processes, and can be used as collateral for loans. These assets also form the basis for depreciation calculations, thus influencing tax liabilities and overall profitability. On the other hand, intangible assets may not have a physical presence but add significant value to a company in terms of its long-term sustainability and competitive positioning.
Intangible assets, such as copyrights, trademarks, patents, customer relationships, and brands, often play a crucial role in driving innovation, customer loyalty, and brand value, which are pivotal for a company’s competitive advantage and market success. Intangible assets can be challenging to value due to their non-physical nature, but their quanitification and reporting are critical in providing a holistic view of a company’s worth. Hence, the differentiation of tangible and intangible assets is crucial in financial reporting, strategic planning, decision making, and corporate finance.
Examples of Tangible vs Intangible
Sure, I can provide you with three examples to illustrate these finance terms:
Real Estate and Software Skills: A piece of real estate is a tangible asset. It is a physical property that you can touch, see, and ultimately sell if necessary. On the other hand, your unique software coding skills (though extremely valuable) are intangible. They’re not something that can be physically touched or sold piece by piece.
Machinery & Brand Reputation: A factory’s machinery that it uses for production is considered a tangible asset. It has a physical presence, can be sold if needed, and contributes directly to product creation. In contrast, the reputation of the brand the factory works for is an intangible asset. It influences consumers’ willingness to buy the product and can have a significant impact on the company’s financial success, but it’s not a physical object that can be sold.
Savings Account & Copyright: The money you have in a savings account is a tangible asset; it is something that exists and that you can access, spend, or invest. A copyright, however, is an intangible asset. While not physical, it is valuable as it legally protects a person’s or company’s exclusive right to reproduce, publish, or sell their original piece of work.
Frequently Asked Questions: Tangible vs. Intangible
What are tangible assets?
Tangible assets are physical and measurable assets that are used in a company’s operations. Examples of tangible assets include land, buildings, machinery, equipment, and vehicles.
What are intangible assets?
Intangible assets, on the other hand, are not physical in nature. They include things like brand reputation, copyrights, patents, trademarks, and business methodologies.
What’s the major difference between tangible and intangible assets?
The main difference between tangible and intangible assets is their physical existence. While tangible assets exist physically and can be touched and seen, intangible assets only exist in a legal sense or as a concept but still provide value to the company.
How are tangible and intangible assets treated in accounting?
In accounting, both tangible and intangible assets are recorded on the balance sheet. Tangible assets are generally depreciated over their useful lives, while intangible assets are typically amortized over their legal lives, or if there is no determinable life, they are not amortized but tested annually for impairment.
Why are intangible assets important?
Though they do not have a physical form, intangible assets can be extremely valuable. They can contribute to a significant portion of a company’s worth and can even be crucial for its long-term success. They can include things like customer goodwill, brand recognition, and intellectual property rights.
Related Entrepreneurship Terms
- Asset Valuation
- Amortization
- Depreciation
- Goodwill
- Intellectual Property
Sources for More Information
- Investopedia: This is a trusted online global source of financial education that covers a wide variety of topics including the concept of tangible and intangible assets.
- Corporate Finance Institute (CFI): This offers a variety of resources and courses about financial concepts such as Tangible vs Intangible.
- AccountingTools: It provides comprehensive accounting content, and also has articles on tangible, intangible assets and their differences.
- AccountingCoach: This is also a great resource to learn accounting and finance topics like the distinction between Tangible and Intangible.
