Definition
Tangible assets are physical, substantive items owned by a company that can be used to produce goods or services, and have a quantifiable value. They include anything you can see or touch like machinery, buildings, vehicles, or inventory. Unlike intangible assets, tangible assets experience depreciation over time.
Key Takeaways
- Tangible Assets are physical and measurable assets that are used in a company’s operations. These assets include properties like machinery, buildings, and land.
- These assets have a definite monetary value and can be used as collateral for loans. They are also subject to depreciation over their useful lives.
- Unlike intangible assets, tangible assets are susceptible to physical damage and are often subject to costs like maintenance and repair.
Importance
Tangible assets are significant in finance due to their physical and measurable value, making them a crucial component in evaluating a company’s worth and financial health.
These assets constitute physical property, like buildings, land, machinery, vehicles, and inventory, which could be sold or utilized to produce goods or deliver services.
They can be used as collateral for loans and help to increase the borrowing ability of a company, thereby providing financial stability.
By estimating the overall value of tangible assets, investors can determine the potential risks and returns associated with investing in a company and derive a more comprehensive picture of a firm’s value beyond just revenues or profits.
Explanation
Tangible assets serve a critical role in a company’s financial and operational objectives as they are physical assets that can be used to produce goods or services, generate revenue, or can be sold to gain capital. They are assets that can be physically seen and touched, and include items like buildings, machinery, vehicles, and inventory.
These assets can contribute to the generation of profits by participating directly in the production process or indirectly by boosting the company’s functionality and value. Most businesses use tangible assets to assist in their daily operations.
For instance, a manufacturing company may use machinery and equipment to produce goods, a restaurant may use kitchen equipment and ingredients (inventory) to prepare meals, and a real estate company may use buildings or land to generate rental income. Tangible assets also provide a certain level of security to creditors and lenders because in case the company cannot meet its financial obligations, these assets can be sold off to repay these debts.
Hence, they hold a fundamental position in a company’s financial planning and decision-making process.
Examples of Tangible Assets
Real Estate Property: This includes both residential and commercial properties. For a business, their offices, warehouses, or retail space would all be considered tangible assets.
Vehicles: If a person or a company owns a car, truck, or any other type of vehicle, that is a tangible asset. For businesses that perform a service like delivery or transportation, their fleet of vehicles would be an important tangible asset.
Machinery and Equipment: In a manufacturing business, all the machinery and equipment used to produce goods are also tangible assets. For instance, a printing press owned by a publishing company or an oven in a bakery would be tangible assets. The same would apply to computers and office furniture in a corporate office setup.
FAQs about Tangible Assets
Q1: What are Tangible Assets?
A: Tangible assets are physical assets that have material value and can be owned by an individual or a company. These include things like buildings, machinery, vehicles, furniture, investments in land, etc.
Q2: How are Tangible Assets valued?
A: Tangible assets are usually valued at their current market price or the price at which they could reasonably be expected to sell in the normal course of business.
Q3: What is the difference between Tangible and Intangible Assets?
A: The key difference between tangible and intangible assets is physicality. While tangible assets have physical form and are visible, intangible assets do not have a physical presence and are not visible. Examples of intangible assets include brand reputation, intellectual property, and business methodologies.
Q4: Can Tangible Assets be depreciated?
A: Yes, tangible assets can be depreciated over their useful lives in accordance with applicable accounting standards. The depreciation of an asset represents the wear and tear, or decline in value, over time.
Q5: Why are Tangible Assets important?
A: Tangible assets are important as they are often the primary assets used to produce goods or services, they can be sold to raise capital when needed, and their value can be used as collateral for loans.
Related Entrepreneurship Terms
- Depreciation
- Fixed Assets
- Capital Expenditure
- Balance Sheet
- Asset Turnover Ratio
Sources for More Information
- Investopedia – This site offers definitions, articles, videos, and tutorials on all aspects of finance and investing, including tangible assets.
- Accounting Tools – This site provides detailed articles and resources on various accounting and financial terms and concepts.
- Corporate Finance Institute – This professional body offers online financial certification programs, and their website hosts a wide range of free to access financial educational material.
- Khan Academy – A nonprofit educational organization that provides free, world-class education for anyone, anywhere. It covers a diverse set of topics including finance and economics.
