Every business requires assets to run its operations and such assets that help a business in maintaining its daily operations are called tangible assets.
What is a Tangible Asset?
Tangible assets are defined as those assets that have a definite monetary value and usually include a physical form. Tangible assets are of much importance to a business as they hold a certain value and are very essential for the daily operations of the business.
Tangible assets can be seen and felt and are also capable of being damaged by fire, natural disaster or any accident. The tangible assets have a clearly defined purchase value or acquisition cost.
Tangible assets can be categorised into two types:
- Fixed Assets
- Current Assets
Fixed Assets: Fixed assets refer to those assets that are very much essential for the business in the long run and are not readily available to be converted into cash at the end of an accounting period. Fixed assets are required for the day to day operations of the business.
As fixed assets cannot be converted into cash, therefore they must be accounted for in the current accounting period and this is achieved by the means of depreciation.
Examples of fixed assets are land, equipment and machinery.
Current assets: Current assets are defined as those assets that are useful in the business for a short period of time. In other words, the current assets have a short life span as they can be easily converted into cash during the accounting period.
Current assets may or may not possess any physical presence but are very useful as they have a definite value. Current assets can be used by the business in paying off small term debts, improving the cash flow of the business.
They are highly liquid in nature which means it is very easy to convert them into cash.
Examples of current assets are inventory, cash and cash equivalents.
Characteristics of Tangible Assets
The following are some of the characteristics of tangible assets:
- They occur in physical form which allows their presence to be touched or felt.
- They can be used as collateral for obtaining loans for business expansion.
- They are essential for maintaining the day to day business operations.
- They play a role in determining the capital structure of the business.
This was all about the topic of Tangible Assets, which is an important component of Accountancy for the students of Commerce. For more information, stay tuned to BYJU’S.