by 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.
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 will not be converted to cash within a year. All types of assets support the operations of a company and help it to achieve its main goal which is generating revenue.
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.
Acquisition of Fixed Assets
Fixed assets refer to long-term tangible assets that are used in the operations of a business. They provide long-term financial benefits, have a useful life of more than one year, and are classified as property, plant, and equipment (PP&E) on the balance sheet.
Fixed asset, in accounting, is defined as a long-term asset having lifespan > 1 financial year and value > capitalizing limit. They are typically bought to generate income. They are also known as Capital Assets and Property, Plant and Equipment (PP&E). These assets are normally not meant to sell or are not easily convertible into cash and therefore are categorized under non-current assets in the balance sheet.
Characteristics of a Fixed Asset
- They can be depreciated
With the exception of land, fixed assets are depreciated to reflect the wear and tear of using the fixed asset.
- They have a useful life of more than one year
Fixed assets are non-current assets that have a useful life of more than one year and appear on a company’s balance sheet as property, plant, and equipment (PP&E).
- They are illiquid
Fixed assets are non-current assets on a company’s balance sheet and cannot be easily converted into cash.
- They are used in business operations and provide a long-term financial benefit
Fixed assets are used by the company to produce goods and services and generate revenue. They are not sold to customers or held for investment purposes.
Asset Types
Current assets or liquid assets are those assets that can easily be converted into cash and are in the business for a short period of time, generally less than or equal to one year. The liquidity of current assets is significantly greater than that of fixed assets.
Fixed assets or hard assets are those held by a business for a long time and cannot be easily converted into cash. Fixed tangible assets are depreciated over a period of time.
Business Importance of Tangible Assets
Depreciation: Depreciation on tangible assets is a non-cash expenditure. It means that it is an expenditure that helps the company receive a tax benefit, but there is no cash outflow from the business.
Liquidity: As tangible current assets can easily be converted into cash, they provide liquidity to the business and, thus, reduce risk. As long as the value of the assets owned by a business is more than the money risked in acquiring them, a business typically remains safe and solvent.
Collateral Security: The assets can be used as collateral security to obtain loans.
Valuation of Tangible Assets
- Liquidation Method
The assets can be converted into cash. Thus, it is important for a company to know the minimum value it would receive from a quick sale or liquidation. An assessor is hired and determines the value that an auction house, equipment seller, or other bulk asset buyers would be willing to pay for such categories of assets as those owned by the company.
- Appraisal Method
Under the appraisal method, an appraiser is hired to determine the true fair market value of a company’s assets. The asset appraiser will assess the current condition of the assets, including the degree of obsolescence and level of wear and tear. Then, the appraiser will compare these values to the values such assets can fetch in the open market.
- Replacement Cost Method
An insurer generally uses the replacement cost method to calculate the value of the asset for insurance purposes. It helps to determine how much it would cost to replace the asset.
Examples of Fixed Assets
- Machinery
- Land
- Buildings and facilities
- Furniture
- Vehicles (company cars, trucks, forklifts, etc.)
- Computer equipment
- Tools
