All the businesses (whether big or small) have assets that help in smooth functioning of day to day operations. The assets can be categorized into two different parts which are known as the tangible and intangible assets. One of the prominent reasons for classifying the assets is to determine the value of the company and take the right decisions beneficial for the business. Knowing the difference between the tangible and intangible assets is extremely important in order to minimize any discrepancies in the financial statements.
One of the important points to note, that both the assets are mentioned on the balance sheet of the company, which is very useful for the proper functioning of an organization. From the balance sheet, the companies can ascertain the financial requirements, if they have any plans for a new product launch or expand to the new locations. Similarly, the banks and investors check the net worth of the company after ascertaining the value of the tangible and intangible mentioned in the balance sheet.
What Are Tangible Assets?
In layman’s terms, tangible assets are basically the physical assets that can be seen or touched. These are generally used in the normal operations of the business to manufacture products or services. The value of the tangible assets depreciates over the years. Tangible assets can both be current and fixed.
- Current Assets: These are essentially the liquid items that can be converted into cash within one year such as the cash (foreign currency), inventory and accounts receivable.
- Fixed Assets: These are those assets that are mainly purchased for the purpose long-term use and cannot be converted into cash within one year such as the buildings, land, and types of equipment.
Tangible Assets Example: Land, vehicle, machinery, furniture, inventory, stocks, bonds, cash, computers
What are Intangible Assets?
These are those assets that do not have any kind of physical existence i.e. cannot be touched or felt but can only be experienced. They are not easy to convert into the cash and are less liquid when compared to the fixed assets. These types of assets have a commercial value and expected to create future cash flow and earnings.
Intangible Assets Example: licensing agreements, blueprints, software, goodwill, copyright, trademark, patent, brand name, internet domains, employment contracts, etc.
Tangible Vs Intangible Assets
Here are some of the common differences between the tangible and intangible assets:
- Description: Tangible assets are physical property whereas the intangible assets are non-physical property.
- Value: The decrease in the value of the tangible assets is known as the depreciation. On the other hand, a decrease in the value of the intangible assets is called amortization. Depreciation means a decrease in the value of a fixed asset over a period of time due to wear and tear or a decline in price. Amortization means paying off a debt with a fixed repayment schedule for a specific period of time.
- Liquidation: Tangible assets can be liquidated easily, which is not possible in case of tangible assets.
- Loans: Tangible assets can be used as collateral to raise the loans. Intangible assets cannot be used by the company to raise the loans.
- Selling: The tangible assets can be sold quickly to raise cash in case of an emergency whereas the intangible assets cannot be sold easily in emergencies.
Final Thoughts: –
Both the tangible and intangible are the prominent aspects of the company. They both are reported in the balance sheet of the company. Tangible assets assist in the production of goods and services, whereas the intangible assets help in creating the future worth of the company. They have their pros and cons when the comparison is made, but it also cannot be denied that they go a long way in ensuring the business operations of the company are conducted in a smooth manner.