What Is a Tangible Asset?
A tangible asset is an asset that has a finite monetary value and usually a physical form. Tangible assets can typically always be transacted for some monetary value though the liquidity of different markets will vary. Tangible assets are the opposite of intangible assets which have a theorized value rather than a transactional exchange value.
A business’ net worth and core operations are highly dependent on its assets. Management of assets and asset implications are one key reason why companies maintain a balance sheet overall. Assets are recorded on the balance sheet and must balance in the simple equations assets minus liabilities equals shareholders’ equity which governs the balance sheet.
Companies have two types of assets: tangible and intangible. Tangible assets are the most basic type of assets on the balance sheet. They are usually the main form of assets in most industries. They are also usually the easiest to understand and value. Tangible assets are assets with a finite or discrete value and usually a physical form. A quick review of a balance sheet will provide a layout of a company’s tangible assets listed by liquidity. The asset portion of the balance sheet is broken out into two parts, current assets and long-term assets. Current assets are assets that can be converted to cash in less than one year. Long-term assets are assets that can be converted to cash in more than a year. All types of assets support the operations of a company and help it to achieve its main goal which is generating revenue.
- Comprehensively, companies have two types of assets: tangible and intangible.
- Tangible assets have a real transactional value and usually a physical form.
- Tangible assets usually account for the majority of a firm’s total assets.
- Tangible assets can be recorded on the balance sheet as either current or long-term assets.
Current and Long-Term Tangible Assets
Tangible assets can be either current assets or long-term assets. Current assets may or may not have a physical onsite presence but they will have a finite transaction value. A company’s most liquid, tangible current assets include cash, cash equivalents, marketable securities, and accounts receivable. All of these tangible assets are included in the calculation of a company’s quick ratio. Other current assets are included in the calculation of a company’s current ratio. The current ratio shows how well a company can cover its current liabilities with its current assets. Current ratio assets include inventory which is not as liquid as cash equivalents but has a finite market value and could be sold for cash if needed in a liquidation.
Long-term assets, sometimes called fixed assets, comprise the second portion of the asset section on the balance sheet. These assets include things like real estate properties, manufacturing plants, manufacturing equipment, vehicles, office furniture, computers, and office supplies. The costs of these assets may or may not be part of a company’s cost of goods sold but regardless they are assets that hold real transactional value for the company.
Tangible assets are recorded on the balance sheet at the cost incurred to acquire them. Long-term tangible assets are reduced in value over time through depreciation. Depreciation is a noncash balance sheet notation that reduces the value of assets by a scheduled amount over time. Current assets are converted to cash within one year and therefore do not need to be devalued over time. For example, inventory is a current asset that is usually sold within one year.
Tangible vs. Intangible Assets
Asset values are important for managing shareholders’ equity and the return on equity ratio metric. Tangible and intangible assets are the two types of assets that makeup the full list of assets comprehensively for a firm. As such, both values are recorded on the balance sheet and analyzed in total performance management.
Intangible assets include non-physical assets that usually have a theoretical value generated by a firm’s own valuation. These assets include things like copyrights, trademarks, patents, licenses, and brand value. Intangible assets are recorded on a balance sheet as long-term assets. There are some itemized values associated with intangible assets that can help form the basis of their balance sheet value such as their registration and renewal costs. Generally though, expenses associated with intangible assets will fall under general and much of intangible value must be determined by the firm itself.
Intangible assets cannot usually be sold individually in an open market but in some cases they may be acquired from other companies. They may also be paid for and transferred as part of an acquisition or merger deal. Intangible assets do contribute to a firm’s net worth and total value if they are recorded on the balance sheet but it is up to the firm to decide on any carrying value.