Difference between Intangible and Tangible Assets

Intangible Assets

An intangible asset is an asset that is not physical in nature. Some examples of intangible assets are goodwill, intellectual property (patents, copyrights or trademarks) and brand recognition. These intangible assets exist in opposition to tangible assets like land, equipment, machinery or inventory. While an intangible asset does not have the physical value of machinery or equipment, it can always prove to be much more valuable for a business, and also be crucial to their long term success. The brand name of a company is an example of an intangible asset, as it stays with the firm till the last day of its existence. These assets are slowly becoming more dominant in the balance sheet of a company. Firms are realising the importance of intangible assets, and are thus more concerned with the proper maintenance of their overall valuation. It will be a crucial component for most, if not all, businesses as they move towards the future.

Tangible Assets

A tangible asset holds a finite monetary value and has a physical existence. Tangible assets can mostly be transacted in individual markets in exchange for some monetary value, but the liquidity can vary, according to the market. Tangible assets are opposite to intangible assets in more ways than one. They are the main form of assets across most industries. They also have the advantage of getting valuated with more ease. Tangible assets have a finite and discrete value. If the assets side of the balance sheet is reviewed, it will help show a clear distinction between the tangible and intangible assets. Some of the examples of tangible assets are land, plant, machinery, building, equipment, etc. It is important to note that these form the backbone of most organisations, and are extremely important in revenue generation for most businesses even today. Hence, it is important for a firm to spend on the maintenance and upkeep of these assets.

Difference between Intangible assets and Tangible assets

The main areas of difference between intangible and tangible assets are as follows:

Intangible assets

Tangible assets

Definition

An intangible asset does not have a physical existence but it possesses a monetary value. It occupies an important position in the company’s balance sheet, and can shore up its overall valuations in the long term.

A tangible asset has a finite value and a physical existence. Tangible assets can typically always be bought or sold in the market for some monetary value, but the liquidity can vary accordingly.

Physical Existence

An intangible asset does not have a physical existence. It is relatively difficult to trade when compared to a tangible asset.

A tangible asset has a physical existence. It is relatively easy to trade when compared to an intangible asset.

Convertibility to cash

It is relatively easy to convert intangible assets to cash, compared to tangible assets.

It is relatively difficult to convert tangible assets to cash, compared to intangible assets.

Valuation

Intangible assets are valued by comparing their cost with market value, and taking the lesser of the two values. It is harder to determine the value of intangible assets compared to tangible assets.

Tangible assets are valued by subtracting the depreciation amount (if applicable) from its cost. It is easier to determine the value of tangible assets compared to intangible assets.

Liquidation

It is harder to liquidate and sell an intangible asset in the market since they do not have a physical presence.

It is easier to liquidate and sell a tangible asset in the market since they have a physical presence.

Examples

Some of the examples of intangible assets are as follows:

  • Brand recognition
  • Goodwill
  • Patents
  • Copyright
  • Trademark

Some of the examples of tangible assets are as follows:

  • Land
  • Machinery
  • Buildings and facilities
  • Furniture
  • Computer equipment
  • Vehicles

Conclusion

It is important to understand that firms require both intangible and tangible assets to run their operations without any hassles. Both have different functions within a company, and investors value them using different methods. They also have their specific advantages which makes them beneficial for any company in the long run. Any enterprise in the world needs both intangible and tangible assets to sustain its business operations on a long term basis.

Frequently Asked Questions

Which of the accounting ratios are commonly used vis-a-vis Intangible assets?

A firm mainly uses two accounting ratios: current ratio and quick ratio vis-a-vis Intangible assets.

What are some of the factors that are important for a tangible asset?

Some of the most important factors related to a tangible asset are as follows:

  • These assets have a physical existence
  • These assets get depreciated over a period of time
  • These assets have a scrap value
  • They can be used as collateral to get loans
  • They are used in the regular day-to-day operations of a business

What is the formula for the calculation of Assets in a company?

The formula for the calculation of assets in a company is mentioned below:

  • Assets = Liabilities + Shareholder’s Equity

What are some of the factors that are important for an intangible asset?

Some of the most important factors related to an intangible asset are as follows:

  • These assets do not have a physical existence
  • These assets generally do not get depreciated or lose their value over a period of time
  • These assets do not have a scrap value
  • These assets create future value for a firm
  • They are typically riskier compared to tangible assets
  • They are relatively difficult to trade compared to tangible assets.

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