- Building Your Business
By
Lisa Jo Rudy
:max_bytes(150000):strip_icc()/IMG_0366a-46d08998110c4dc4962856c16d73d87e.jpg "Identifying Tangible and Intangible Assets in Your Business (1)")
Lisa Jo Rudy
Lisa Jo Rudy covers entrepreneurship and small business finance and terms for The Balance. During her career, Lisa launched her own small writing and instructional design business and writes about business for major web publishers such as Harvard Business Publishing. As a teacher and instructional designer, Lisa has created business-related tutorials and interactive courses for universities, educational publishers, and students and adults entering the business world.
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Updated on December 31, 2021
Reviewed by
Khadija Khartit
:max_bytes(150000):strip_icc()/KhadijaKhartit-4f144e2b63ee4dd4af60ac8a02233c50.jpg "Identifying Tangible and Intangible Assets in Your Business (2)")
Reviewed byKhadija Khartit
Khadija Khartit is a strategy, investment, and funding expert, and an educator of fintech and strategic finance in top universities. She has been an investor, entrepreneur, and advisor for more than 25 years. She is a FINRA Series 7, 63, and 66 license holder.
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:max_bytes(150000):strip_icc()/TangibleAssets-4cde5e12b3174ecb9b9ff8ad5b9fc883.jpeg "Identifying Tangible and Intangible Assets in Your Business (3)")
Assets include everything your business owns. Tangible assets are generally anything you can physically touch—from inventory to buildings to copying machines. Intangible assets, meanwhile, are anything of value that you can’t physically touch such as trademarks, domain names, and the goodwill you’ve built up around your company’s reputation.
In many cases, a company’s intangible assets are more valuable than their tangible assets. Think of companies whose work involves the development of intangible products such as computer software and technology solutions. Think also of technology-based, social, and community platforms whose value resides mainly in the value of the network, the brand, and the user base.
Key Takeaways
- Tangible assets are usually physical objects (like equipment and inventory) while intangible assets are valuable assets that can’t be touched (such as trademarks).
- Both tangible and intangible assets have value and can be bought and sold.
- It is easier to establish the value of a tangible asset than an intangible asset.
- While the difference between tangible and intangible assets seems obvious, it may take an expert to distinguish between the two and account for each appropriately.
What’s the Difference Between Tangible and Intangible Assets?
The difference between tangible and intangible assets may seem obvious: if you can touch it, it’s tangible; if you can’t, it isn’t. However, in an era when apps and influence can be more valuable than spark plugs or apples, the difference isn’t always so clear-cut. Here are some of the key distinctions between the two:
| Qualities of Tangible Assets | Qualities of Intangible Assets |
| Can be physically touched | Cannot be physically touched |
| Easier to value and account for because of clearly defined cost and expected lifespan. | Include goodwill and intellectual property |
| Easier to sell for the purpose of raising cash | Have perceivable value |
| Can be depreciated | Can be amortized |
| Have residual value | Have no residual value |
| Can be destroyed by flood or fire and need general business or liability insurance | Can be compelling longer-term investments |
| Can be destroyed by poor decision-making and may need specialized insurance |
Tangible assets also fall into two groups: current and fixed assets. Current assets are used in day-to-day business operations and can be used up or converted into cash within a single year. By contrast, fixed assets are larger items like buildings, land, and major equipment that can depreciate over time.
Like tangible assets, there are two distinct groups of intangible assets: definite and indefinite. Definite intangible assets are time-limited while indefinite intangibles are not. Here are examples of both types of assets.
| Examples of Current Tangible Assets | Examples of Fixed Tangible Assets | Examples of Definite Intangible Assets | Examples of Indefinite Intangible Assets |
| Inventory | Buildings | Leases | Goodwill of customers |
| Investments | Land | Patents | Goodwill of employees |
| Cash | Major equipment | Trademarks | Research findings |
| Copyrights | Algorithms | ||
| Contracts | Intellectual property | ||
| Accounts receivable | Brand name |
Physical and Nonphysical Property
In general, it’s easy to distinguish between physical and non-physical properties.
Note
Since physical property can actually be touched, it can be easier to value or sell. Non-physical property, however, can’t be touched, thus making it more difficult to do the same.
But as digital transactions have become the norm, it can become trickier to distinguish between physical and nonphysical property. For example:
- Streaming music and videos are considered to be intangible property, but of course they are valued, bought, and sold every day.
- Stock investments are considered to be tangible assets, but they have no physical form; they are simply listed and managed as digital assets.
- Cryptocurrencies, like Bitcoin, behave like other investments but for the purposes of Generally Accepted Accounting Principles (GAAP), do not meet the test for being tangible assets.
Depreciation vs. Amortization
The value of most tangible assets decreases over time due to age, wear and tear or obsolescence. This process is known as depreciation, which allows businesses to deduct the declining value of these assets from their taxes.
Note
There are some tangible assets that are not considered depreciable by the IRS such as land.
Amortization, meanwhile, is the process of spreading out the cost of an intangible asset (a patent, copyright, etc.) over a period of time.
How Value Is Determined
It’s usually fairly easy to value a tangible asset: it’s worth whatever the market will bear. For example, a new car in a showroom is worth an agreed-upon amount, and its value depreciates by a set amount from year to year. Of course, some values fluctuate over time: the value of a barrel of oil, for instance, changes constantly, as do the values of stocks—but those values can be researched and verified.
Some intangible assets can also be easier to value by asking:
- What would a buyer pay to own or use the intangible asset?
- What is the useful life of this asset?
For example, a pharmaceutical company can make a good estimate as to the market value of the patent for a new drug based on projected sales of the drug. In addition, because patents are time-limited, it’s relatively easy to amortize their value. A 10-year drug patent will be worth less if five of the 10 years have already passed.
There are, however, intangible assets that are more difficult to value such as goodwill or branding, which are essentially subjective. For example, it’s possible to value the Coca-Cola brand simply on the basis of its secret recipe or how much money has been spent over time to design and promote the brand. But that doesn’t take into account the longevity of the brand, the goodwill of consumers, or other critical issues.
The Bottom Line
Both tangible and intangible assets have value, but tangible assets are generally physical items that can be easily turned into liquid assets while intangible assets are harder to value or sell. As a result, businesses make it a point to own both tangible and intangible assets. This is especially important if you’re thinking about taking out a loan or if you feel you might need access to cash.
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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
Internal Revenue Service. "Topic No. 704 Depreciation."
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