What is the Difference Between Tangible and Intangible Assets

Many investors use financial analysis to find the best companies. This involves looking at the financial statements of a company in order to determine if they are financially sound enough to justify an investment.

This approach will allow you to identify two main categories of assets in the company's balance sheet: tangible assets and intangible. Here's what to know about these subcategories and the differences between tangible and intangible assets.

What are tangible assets?

The name of tangible assets refers to assets with a physical form. These assets are easily viewed, felt and touched. Many also call them 'hard assets'.

Manufacturing equipment, plant and machine, land, buildings, vehicles, and other tangible assets are just a few examples. These assets are usually directly involved in the production and sale of goods or services. They can include peripheral accessories such as printers and computers, which may or not be directly involved with the production.

What is intangible asset ?

Intangible assets are assets that don't have any physical form. These assets are only tangible and can't be touched, seen, felt or touched. They do however have a distinct monetary worth. Intangible assets are not tangible assets. Their monetary value cannot be quantified or determined easily, as their value is not specific or fixed.

Intangible assets include, for example, goodwill, trademarks and patents, company brand, logo and other intellectual assets. These assets may not be directly used in the production or sale of goods and services by a company, but they are still a source for revenue.

What are the main differences between tangible assets ?

Let's now look at what these two types of assets are.

Form

As you can see, the main difference between tangible and intangible assets lies in their form. Intangible assets are physical assets that have a physical form. Tangible assets only exist on paper.

Value

Fixed monetary values are associated with tangible assets. Intangible assets, however, do not have a fixed monetary value. A tangible asset such as a vehicle, for example, has a finite value. However, the value of intangible assets such as patents or trademarks is not finite.

Value determination

It is easy to determine the value of tangible assets, as we have already mentioned. To determine the value of a tangible item like a mobile telephone, you only need to find the price of similar phones. It can be difficult to determine the value of an intangible assets like a patent, trademark or other intellectual property because similar products may not always exist on the market.

Life span

Most tangible assets have a fixed life expectancy. After that they can cease to be functional or cease to exist. Laptops and other tangible assets, such as computer equipment, may not work beyond a specific time. In the same way, inventories and raw materials of manufacturing companies are no longer useful once they're used to make finished goods. Intangible assets have a limited lifespan. They are not subject to expiration because they only exist on paper.

Depreciation

A minor difference between tangible and intangible assets is how they are accounted by companies. Intangible assets can be amortized, but tangible assets are depreciated. Depreciation refers to the accounting of the decline in value over time due wear and tear. Amortization refers to the spreading of the intangible asset's value over a time period.

Liquidation

It is easy to liquidate tangible assets because the value can be easily determined. Intangible assets are more difficult to liquidate because there is no data available to determine their value. Not all intangible assets are useful to another company. Think of customer loyalty or goodwill as examples. This makes liquidation more difficult.

Conclusion

You are now aware of the differences between tangible and intangible assets. However, there is another important point you should remember. Companies often sub-classify these assets in their balance sheets into 'current and 'noncurrent assets depending on whether they have a short-term, or long-term effect on the business. These bits of information will make it easier for you to understand the financials of a company.