Tangible vs Intangible Assets: Here Are The Differences

Article Summary:

A company’s assets fall into two categories: intangible and tangible assets. Intangible assets are objects of monetary value that you cannot touch, while tangible assets are physical objects used by the organization. While both are important to the success of a business, intangible assets tend to bring more revenue over time than tangible assets.

When you enter the business world, you may hear references to tangible and intangible assets. These assets are crucial to the success of a company.

Simply put, tangible assets are physical items, while intangible assets cannot be seen or touched. While this may seem like a simple concept, understanding these terms can help a business operate smoothly and budget efficiently. For example, you may be more willing to spend money on intangible assets when you learn that they often bring in more money than tangible assets.

There is more to these terms than just the definition. Here, we will discuss the difference between tangible and intangible assets, look at why they’re important, and lay out a few examples of each.

What are tangible and intangible assets, and why are they important?

Assets are anything a company owns. Assets are broken into two different categories: tangible vs. intangible. Intangible assets have a physical presence while intangible assets do not.

Make better financial decisions

A company cannot succeed without tangible and intangible assets. Knowing what tangible and intangible assets are, and understanding the differences between them, can help you make better financial decisions. For example, knowing which asset is more valuable for your company’s brand will help you know how to responsibly deploy the company’s financial resources.

Better understand business priorities

Knowing the differences between these assets can help you understand how an organization functions and makes money. At first, you may be confused about why the company you’re working for is investing so much in intangible assets. But knowing why they’re valuable will help you understand.

Build a better balance sheet

Understanding what tangible and intangible assets are is also important because they will be listed on a company’s balance sheet. If you are in charge of creating your work’s balance sheet, make sure you have a clear understanding of what these assets are before you begin. You’ll also want a solid understanding of these assets if you are an investor and need to analyze the balance sheet.

Tangible assets

Tangible assets are physical property owned by a company and used to run the business. For example, tangible assets include equipment or machinery, such as fax machines and forklifts.

Key qualities of tangible assets

The main characteristics of tangible assets are as follows:

  • Tangible (you can touch and see them)
  • They can be physically destroyed
  • The value of tangible assets is easier to determine from the beginning
  • The value of these assets may drop with time

There are two different types of tangible assets: fixed assets and current assets.

Fixed assets

Fixed assets are physical items that cannot be easily converted to cash. As time goes on, the value of fixed assets diminishes. Examples of fixed assets include machinery, buildings, and vehicles. If something takes more than a year to produce income then it is usually considered a fixed asset.

Fixed assets are also referred to as hard assets.

Current assets

Current assets, also known as liquid assets, are physically present items that can quickly be exchanged for cash. These tend to be more available than fixed assets. Current assets include cash and money market accounts, to name two examples. Generally, something is considered a current asset if it can be exchanged for money in less than a year.

Intangible assets

Intangible assets are things that cannot be physically held but have a monetary value. Examples of intangible assets include copyrights, trademarks, and patents.

Key qualities of intangible assets

The following are some of the main traits of intangible assets:

  • Intangible (do not physically exist)
  • Cannot be physically destroyed
  • The value of an intangible asset often grows with time
  • The monetary value may not be clear at the beginning

Although not physical, intangible assets are very important to the success of a company. They can often have a higher monetary value than their physical counterparts. An intangible asset could have more long-term value than a tangible asset. In fact, some companies report that intangible assets account for up to 80% of their market value. This may seem confusing at first, but in reality, a patent will likely bring more income than a piece of machinery will.

Pro tips for investors

An intangible-assets caution

Some professional investors warn that you should closely examine the value assigned to intangible assets on company balance sheets. Ethically challenged businesses have been known to inflate these values in an unrealistic way, making their company look like a better buy than it is. Not all intangible assets are equally valuable. Make sure you know what you’re paying for when you invest.

Learn about gross and net profit

You’re going to see a lot about gross profit and net profit in the business world. These profits are used to determine a company’s financial health. To learn more about these terms, click here.

Examples of tangible and intangible assets

The basic distinction between tangible and intangible assets is pretty easy to grasp. Tangible assets are, well, tangible, meaning they have a physical existence. Intangible assets, on the other hand, do not exist physically. Yet both can be owned by a company (that’s what makes them company assets).

So, things seem pretty clear in the abstract. But you really don’t know you understand something until you can make it concrete. That means examples. Here are some examples of tangible assets and intangible assets:

Tangible assets

There are countless examples of tangible assets. Basically, if a company owns it, it’s used to generate a profit, and you can physically touch it, it’s likely a tangible asset. But tangible assets usually fall into one of four categories: equipment and machinery, inventory, land, and receivables.

Key tangible asset types

  • Equipment and machinery: This includes equipment used to run a business. Equipment could include telephones, copy machines, computers, or cranes, product line machines, and more. Equipment is a fixed, long-term asset.
  • Inventory: These are items or goods sold to make a profit. This includes raw materials and both finished and unfinished products.
  • Land: Land is a long-term asset, meaning the business will use it for at least a year. Land is also considered a fixed asset.
  • Receivables: Receivable assets represent the money customers owe for bills, such as utilities and electric bills. So, when you receive your water bill in the mail, that is an example of receivable assets.

Intangible assets

Though there are many examples of intangible assets, they generally fall into five main categories: customer lists, brand equity, goodwill, intellectual property, and licensing.

Key intangible asset types

  • Customer lists: Customer lists are exactly what they sound like. They’re lists of people who have placed or could place an order for a product. This information is valuable as it can generate sales and help you form a good marketing technique.
  • Brand equity: Brand recognition can help generate sales of a product. For instance, someone might be more inclined to buy a product from one brand over another because of that company’s reputation. A product might also be more successful simply because it’s generated by a well-known brand. This is brand equity.
  • Goodwill: This is when one company acquires another company. The company’s brand, name, customers, and employees fall into this category.
  • Intellectual property: Intellectual property includes copyrights, trademarks, designs, trade secrets, research and development, patents, and more.
  • Licensing: Licensing could refer to a couple of different things. A business may purchase a license to operate, produce products, and make money. A business could also purchase a license to use a particular product. For example, a company may buy the licensing to a certain type of computer software in order to use it to make products and sales.

Dealing with business liquidity problems

As you’ve learned, one type of tangible asset is current or liquid assets. But what if you need some liquidity (read: cash) for a priority business expense that your available liquid assets won’t cover or won’t cover quickly?

This is where a business line of credit comes in. Just like a personal line of credit or credit card, a business line of credit lets you take care of pressing expenses now then pay for them later. This eliminates the need to wait until you’ve turned some of your current assets into cash.

FAQ

What are not intangible assets?

It’s safe to assume that basically anything that can be physically touched or seen is not an intangible asset. Intangible assets include items such as patents, licenses, and trademarks.

What is the difference between tangible and intangible benefits?

Tangible and intangible benefits differ in a way similar to how tangible and intangible assets do. On the personal level, examples of tangible benefits include financial pay and benefits. These can both be put in numerical terms and measured, making them tangible. An example of an intangible benefit is job satisfaction. Aside from highly subjective “on a scale of one to 10” ratings, this can’t be put in precise numerical terms or reliably measured. Yet the value you place on a job may be influenced more by its intangible benefits than its tangible ones.

The concepts of tangible and intangible benefits are not used solely for deciding the personal value of something like a job. They also figure in the cost-benefit analysis that any prudent businessperson will do before deciding to go ahead with a proposed course of action or project. As with personal decisions, the tangible benefits of business actions are much easier to assess than the intangible benefits, yet the intangible benefits can sometimes have greater value. An example is the public goodwill won by adopting corporate policies that the public perceives as friendly to the environment.

What are the 5 intangible assets?

The five main categories of intangible assets are goodwill, intellectual property, brand equity, licensing, and customer lists.

Key takeaways

When valuing your own company in pursuit of investors or lender financing, or when valuing a company you are thinking of investing in, knowing how to identify tangible and intangible assets is a key skill. The key points to take from this article, then, are the differences between these two types of assets. To help you lock in your new knowledge, here is a tabular summary:

Asset types: key differences
Tangible assetsIntangible assets
These are any physical properties owned by a company.These are properties owned by a company that are not physical.
Examples include inventory, equipment, vehicles, and buildings.Examples include patents, licenses, and customer lists.

Keep learning about business

If you’re interested in learning more about how businesses budget and manage their finances, learn more about EBIT and EBITDA. Both of these formulas can be used to determine how a company is performing financially. Understanding this as well as tangible and intangible assets (and gross and net profit) can help you in the business finance world, whether as a business owner, investor, or employee rising up the corporate ladder.

View Article Sources
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