Difference Between Tangible and Intangible Assets: A Quick Guide

Assets are a vital component of any business. Assets are the resources owned and controlled by a company that helps it operate, generate revenue, and develop over time. Some assets are visible and tangible, including property, plant and equipment, vehicles, and furniture. Such assets are called tangible assets.

There are also some assets which are intangible and do not have any physical shape, though they add great value to a firm. Examples of intangible assets include patents, trademarks, copyrights, and goodwill.

This article explains the major differences between tangible and intangible assets in a business.

Key Takeaways

• Tangible assets have a physical form, while intangible assets do not.
• Buildings, machinery, vehicles, and inventory are common examples of tangible assets.
• Patents, trademarks, copyrights, software, and goodwill are common intangible assets.
• Tangible assets are generally depreciated, while limited-life intangible assets are generally amortised.
• Both types of assets are important because they can help a business operate, generate income, and grow.

What are Tangible Assets?

Tangible assets are assets that have a physical substance. In other words, tangible assets are assets that a business entity can see and feel. Tangible assets are generally acquired or developed by the business for its normal operations.

Tangible assets are classified into two major types: current tangible assets and fixed tangible assets.

Current tangible assets are assets which will be used or converted into cash within a short period of time, which is generally one year. Inventory is an example of current tangible assets.

Fixed tangible assets are used over a long period of time.

Read More: What is Asset Management?

What are Intangible Assets?

Intangible assets are the type of resources that lack physical substance but have economic value. While you cannot feel an intangible asset with your hands, it is able to help the company make money, attract customers, or secure a competitive advantage.

For instance, the value of a brand name of a company may amount to millions of dollars, although the brand name itself is something intangible.

Intangible assets play a particularly significant role in modern business. Companies dealing with technology, media, pharmaceuticals, and consumer goods often use intangible assets a lot. Sometimes, intangible assets prove to be more valuable than tangible ones.

Difference Between Tangible and Intangible Assets

Basis	Tangible Assets	Intangible Assets
Meaning	Assets that have a physical form and can be seen and touched.	Assets that do not have a physical form but have economic value.
Physical existence	Have a physical presence.	Have no physical presence.
Valuation	Usually easier to value because they have a clear purchase price or market value.	Often more difficult to value because their worth can depend on future benefits.
Depreciation	Most long-term tangible assets are depreciated over their useful life.	Limited-life intangible assets are generally amortised instead of depreciated.
Value reduction	Can lose value due to wear and tear, damage, or becoming outdated.	Can lose value because of expired rights, competition, outdated technology, or loss of reputation.
Main purpose	Used mainly to support business operations and production.	Used to provide legal rights, intellectual advantages, or competitive benefits.
Liquidity	Some tangible assets can be sold relatively easily, depending on the asset.	Intangible assets may be more difficult to sell because their value can be harder to determine.
Importance	Particularly important for manufacturing, construction, transport, and other physical businesses.	Particularly important for technology, pharmaceutical, media, and brand-based businesses.

Importance of Tangible and Intangible Assets

It is natural for one to consider tangible assets to be more important than intangible assets because tangible assets can be observed with our eyes. However, at times, intangible assets may prove to be more important than physical assets.

Suppose there is a popular company with a strong brand name. There may be some physical assets such as the buildings and equipment owned by the company, but people may buy products of this company just because of the brand. Brand is an example of an intangible asset.

For example, a pharmaceutical firm may take several years to develop a new drug. The physical asset may be laboratory equipment, whereas the patent for the drug may prove to be the most important intangible asset.

A successful company should be aware of both assets. Physical assets enable the business to conduct physical operations, while intangible assets can make a company differentiate itself from its competitors.

Read More: What are Assets and Liabilities?

Conclusion