Tangible Assets Meaning
Tangible assets are assets with significant value and are available in physical form. It means any asset that can be touched and felt could be labeled a tangible one with a long-term valuation. These fixed assets help businesses manufacture/produce goods and products for enhanced sales. Moreover, companies can also use these assets as collateral for loans.
A tangible assets examples list includes cash, inventory, plant, machinery, building, etc. These differ from intangible ones, which have non-physical existence, but they still hold value. The non-physical assets include patents, trademarks, intellectual property, goodwillGoodwillIn accounting, goodwill is an intangible asset that is generated when one company purchases another company for a price that is greater than the sum of the company's net identifiable assets at the time of acquisition. It is determined by subtracting the fair value of the company's net identifiable assets from the total purchase price., etc.
Table of contents
- Tangible assets are physical assets with significant value, which help businesses produce and provide goods and items for sale.
- These assets are likely to depreciate over time. Thus, businesses must focus on their maintenance to uphold their value in the long run.
- The physical assets are of two types – current assets (can be sold and exchanged for money) and fixed assets (cannot be sold but helps in the production process).
- It is opposite to intangible properties, which signify non-physical existence like goodwill, patents, trademark, etc.
Understanding Tangible Assets
Tangible assets are physical properties that possess a definite value. Therefore, these assets play an important role in making business organizations productive. For example, a plant, building, machinery, equipment, etc., form part of fixed physical assets and help make businesses more productive. In addition, the presence of these assets facilitates the manufacture and production of goods and products. Thus, they have a vital role in ensuring profitabilityProfitabilityProfitability refers to a company's ability to generate revenue and maximize profit above its expenditure and operational costs. It is measured using specific ratios such as gross profit margin, EBITDA, and net profit margin. It aids investors in analyzing the company's performance. for a business.
These assets help produce and provide goods and services, contributing to the businesses’ growth and cash flowCash FlowCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. . In addition, firms can exchange these assets for money to raise cash during emergencies or financial crises. Moreover, they can use these physical assets as collateral/security to back finances they obtain from lenders.
The physical assets are subject to depreciation, which means they lose their value over time. As a result, the companies using those sets of assets are eligible to receive tax benefitsTax BenefitsTax benefits refer to the credit that a business receives on its tax liability for complying with a norm proposed by the government. The advantage is either credited back to the company after paying its regular taxation amount or deducted when paying the tax liability in the first place. without any cash outflow marked from the business.
There are two types of tangible properties – Current assetsCurrent AssetsCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc. and fixed assetsFixed AssetsFixed assets are assets that are held for the long term and are not expected to be converted into cash in a short period of time. Plant and machinery, land and buildings, furniture, computers, copyright, and vehicles are all examples..
As current assets are liquid assetsLiquid AssetsLiquid Assets are the business assets that can be converted into cash within a short period, such as cash, marketable securities, and money market instruments. They are recorded on the asset side of the company's balance sheet., companies can sell them at the end of a financial year. These can be cash or physical items used or sold to increase cash flow and repay debts Debts Debt is the practice of borrowing a tangible item, primarily money by an individual, business, or government, from another person, financial institution, or state.and other liabilities. Stocks are one of the best examples of a current physical asset.
On the other hand, firms cannot sell fixed assets easily, given the long-term investments involved. Yet, these are the physical items that help enhance the productivity of any business and make it function smoothly. Machinery, plant, or building are some of the most common fixed assets examples.
Physical assets hold significant value. However, their liquidity will vary as per market variations and fluctuations. Moreover, the physical existence of tangible properties makes businesses ensure their proper maintenance. Therefore, they have to conduct the maintenance tasks for the business plants, tools, equipment, machinery, and other assets to uphold their value and continue functioning smoothly for better and more efficient production output.
In short, tangible assets valuation completely depends on their treatment and maintenance for efficient functioning.
Tangible Assets in Accounting
Recording these assets in accountingAssets In AccountingAssets in accounting refer to the organization's resources that hold specific economic value and facilitate business operations, meet expenses, and generate cash flow. They create the company's worth and are recorded in the balance sheet. is a crucial affair. As fixed assets, these properties fall under the long-term asset section in an organization’s balance sheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company.. The records list these assets as a number or multiple asset classificationAsset ClassificationAsset classification is a systematic process of assigning the assets to their respective class or group. Such grouping of the assets is done based on the common characteristics possessed by them. Like current assets and fixed assets are categorized as per the duration the company holds these assets. paired with accumulated depreciationAccumulated DepreciationThe accumulated depreciation of an asset is the amount of cumulative depreciation charged on the asset from its purchase date until the reporting date. It is a contra-account, the difference between the asset's purchase price and its carrying value on the balance sheet. contra accountsContra AccountsContra Account is an opposite entry passed to offset its related original account balances in the ledger. It helps a business retrieve the actual capital amount & amount of decrease in the value, hence representing the account’s net balances. .
On the contrary, current assets are included under the short-term asset section as they are likely to be sold and converted into cash. Thus, they are transferred into the revenue section as soon as they are liquidated.
These are recorded on the balance sheet at their original cost. However, one can add all the costs involved in getting the asset ready for its intended use. These costs might include legal fees, transportation, necessary testing, and non-recoverable taxes. Property, Plant, and Equipment costs are not recorded at their market value.
Tangible Assets Examples
Let us consider the following tangible assets examples to understand how this concept works:
A high cap company holds a large percentage of fixed assets, including plant, equipment, and machinery. The companies operating in the oil and gas sector or real estate industry tend to have many tangible properties. Thus, they produce more output to generate higher sales, meet market demand, and ensure better revenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions..
A service-based company, such as software production units, has tangible properties that help them implement its innovative ideas correctly. However, these firms are more into having intellectual properties. They own patents and copyrights for the products and ideas they come up with. Some examples of such service companies are Microsoft, Infosys, etc.
Tangible Assets vs Intangible Assets
Tangible assets and intangible assets are two opposite terms widely used in the financial perspective. Let us have a glance at the differences between the two concepts:
|Depreciates over time
|No depreciation risk
|Prone to physical damage (For example – fire, accident, disaster, etc. could affect)
|Prone to goodwill damage (For example – brand name or reputation could be affected)
|Cash, building, plant, investment, stocks, machinery, inventory, etc.
|Goodwill, copyright, patent, trademark, intellectual properties, etc.
Frequently Asked Questions (FAQs)
A tangible asset is an asset available in physical form, holding a significant value. These assets help businesses and companies produce and provide goods and products to customers for efficient sales and higher revenue generation. However, these assets tend to lose value over time because of their deteriorating efficiency. Thus, the maintenance of these physical assets should be a priority for businesses. Some examples include cash, plant, building, inventory, machinery, equipment, etc.
NTA is calculated as the difference between the total assets and the liabilities, the par value of assets, and the intangible ones. The formula is as follows:
Yes, stocks are physical assets as they can be sold in a financial year and converted to cash whenever needed. This is a current asset used to resolve debts or cover other financial liabilities or obligations.
Tangible Assets Video
This article is a guide to what are Tangible Assets, their meaning & valuation. Here we explore tangible vs intangible assets along with some proven examples. You may also have a look at the following recommended articles on basic accounting –