Companies need to have assets, but it can be hard to determine the difference between tangible and intangible assets.

A company’s tangible assets are property, equipment, or inventory, while intangible assets are trademarks, copyrights, or patents that still have value for the company.

These intangible assets may include anything from an idea to a song lyric.

Tangible vs. Intangible Assets: Understanding Both

Tangible Assets

A tangible asset is a physical object with value to a company. In other words, all tangible assets can be seen and touched, so it’s essential to consider their overall worth. Examples include land, equipment, inventory, accounts receivable, and cash.

Intangible Assets

Intangible assets are things like copyrights, trademarks, or patents. They’re not physical objects, but they still have value for the company.

These assets can be significant, and it’s essential to understand their importance when making decisions about a company’s future.

Intangible assets categorized as “goodwill” cannot be physically seen, but the term refers to not seeing something like a brand name or reputation.

The value of intangible assets can be estimated using the income approach, which bases its value on the remaining cash flows expected to derive from an asset in the future.

Tangible and Intangible Assets: Main Differences

The main difference between tangible and intangible assets is that tangible assets are physical objects, while intangible assets are not. In addition, intangible assets often have more value than tangible ones because they are hard to duplicate.

For example, a company’s brand name or reputation might be worth more than its physical property. Therefore, it’s essential to understand both types of assets when deciding its future.

Another critical difference between tangible and intangible assets is that intangible assets are often more challenging to quantify. For example, it might be easier to determine the value of a piece of equipment that a company owns than to calculate the value of a trademark.

However, intangible assets can be significant for a company’s long-term success.

For example, copyright and patent protection can help companies safeguard their intellectual property and generate revenue. In addition, trademarks can help companies distinguish their products from competitors.

Types of Tangible Assets

There are different types of tangible assets that a company can own.

• Property is land and anything located on or under the ground, including structures, minerals, and oil and gas rights.
• Equipment is any item used in a business and has a value other than its scrap value.
• Inventory is the number of units of a product that a company has on hand to sell.
• Customers’ accounts receivable is money owed to the company because they bought goods or services on credit.
• Cash or cash equivalents are funds you can easily exchange for other assets, such as bank deposits, Treasury bills and notes, U.S. savings bonds, and certificates of deposit (CDs).

Types of Intangible Assets

There are different types of intangible assets that a company can own.

• Copyrights are the exclusive legal rights to reproduce, publish, or perform work.
• Trademarks are words, phrases, symbols, or designs that identify and distinguish the source of goods or services.
• Patents are granted for inventions and give the inventor the right to stop others from making, using, or selling the invention for a limited period.
• Trade secrets are not generally known information and give a company an advantage over its competitors.
• Goodwill is an intangible asset representing the value of a company’s name and reputation. This value is based on the future earning potential of the business. It’s challenging to estimate goodwill because it can be hard to determine its worth.

How Value is Determined in Assets

When assessing a company’s assets, it’s crucial to understand their value. The income approach is one method that is used to calculate the value of intangible assets. As mentioned before, this approach bases its value on the remaining cash flows expected from the asset in the future.

It’s important to note that intangible assets can be significant for its long-term success. They can help a company protect its intellectual property and generate revenue. Copyrights, trademarks, and patents are all examples of intangible assets that can be very valuable to a business. However, companies will also have tangible assets.

They may own property, equipment, inventory, accounts receivable, and cash or cash equivalents that can be easily exchanged for other assets. The company’s management must consider both the intangible and tangible assets’ value when determining a business’s overall worth.

The value is determined using the income approach, which is based on three variables:

1. Discounted future cash flows
2. Competitive advantages – things like patents that give the company a leg up on its competition in some way
3. Strategic advantages –  can include things like international market penetration or having an exclusive contract with retailers.

It’s more challenging to assess the value of intangible assets, but they’re often significant for a company’s long-term success.

If necessary, some intangible assets may even allow businesses to lean on legal solutions if problems arise with other assets.

For example, you could use copyright protection to prevent others from copying music created by an artist or band hired on a contract.

Sample Case of Intangible Assets

The Coca-Cola Company is the world’s largest beverage company. It has a stock market value of over $180 billion and has been around for more than a century. In addition to its massive revenue, what makes this company so valuable?

Not only does it own tangible assets such as bottling plants and equipment, but it also owns intangible assets such as brands and logos. These intangible assets have great worth because they represent the company’s reputation.

The Coca-Cola brand name has become a symbol that is synonymous with refreshment and happiness, making it difficult for consumers to ever imagine life without their favorite carbonated soft drink!

Conclusion

In a nutshell, tangible assets are physical items that a company owns, such as property, equipment, or inventory. In contrast, intangible assets are trademarks, copyrights, patents, and not physical objects but still have value for the company.

The value is determined using the income approach, which is based on three variables:

• Discounted future cash flows
• Competitive advantages like patents
• Strategic benefits include international market penetration or exclusive contracts with retailers.

It’s more challenging to assess intangible asset values than tangible asset values because most don’t generate revenue directly.