What is a Tangible Asset
A tangible asset is an asset that has a physical form. Tangible assets include both fixed assets, such as machinery, buildings and land, and current assets, such as inventory.
The opposite of a tangible asset is an intangible asset. Nonphysical assets, such as patents, trademarks, copyrights, goodwill and brand recognition, are all examples of intangible assets.
BREAKING DOWN Tangible Asset
A business’ core operations are centered around its assets which is recorded on the balance sheet statement. Assets equal the sum of a company’s total liabilities and its shareholders’ equity. The main form of assets in most industries are tangible assets.
Tangible assets are physical items of value which are used to generate revenue for a company. Tangible assets are either current or fixed. Current assets include items such as cash, inventory, and marketable securities. These items are typically used within a year and, thus, can be more readily sold to raise cash for emergencies. Fixed assets, on the other hand, are noncurrent assets which a company uses in its business operations for more than a year. They are recorded on the balance sheet as Property, Plant and Equipment (PP&E), and include assets such as trucks, machinery, office furniture, buildings, etc. The money that a company generates using tangible assets is recorded on the income statement as revenue.
Tangible current assets are recorded at the cost incurred to acquire them. The cost of an asset is usually available on the bill or invoice received from the seller. If the firm purchased inventory for $200,000, this is what will be shown on the financial statement. The cost for tangible fixed assets may include transportation costs, installation costs, and insurance costs related to the purchased asset. If a firm purchased machinery for $500,000 and incurred transportation expenses of $10,000 and installation costs of $7,500, the cost of the machinery will be recognized at $517,500.
Tangible fixed assets receive special treatment for accounting purposes since they have an anticipated useful life of more than one year. A company uses a process called depreciation to allocate part of the asset's expense to each year of its useful life, instead of allocating the entire expense to the year in which the asset is purchased. This means that each year that the equipment or machinery is put to use, the cost associated with using up the asset over time is recorded. In effect, tangible fixed assets lose value as they age. The rate at which a company chooses to depreciate its assets may result in a book value that differs from the current market value of the assets. Depreciation is recorded as an expense on the income statement.
Tangible assets can also be impaired due to damage or obsolescence. When an asset is impaired, its fair value decreases which will lead to an adjustment of book value on the balance sheet. A loss will also be recognized on the income statement. If the carrying amount exceeds the recoverable amount, an impairment expense amounting to the difference is recognized in the period. If the carrying amount is less than the recoverable amount, no impairment is recognized. A tangible asset that is fixed may be disposed of or sold at the end of its useful life for a salvage value, which is the estimated value of the asset if it was sold in parts.