Whether you’re calculating net worth or maintaining the balance sheet, tangible assets form a valuable component of business operations. Discover what tangible assets are, and how their value is calculated below.
What are tangible assets?
When tallying up your company’s assets for accounting purposes, you’ll need to distinguish between tangible and intangible assets. A business counts any asset with a physical form and clear monetary value as a tangible asset. Equipment, vehicles, and computers are all examples. By contrast, intangible assets have a theoretical value and include things like patents or intellectual property.
Tangible assets examples
There are a few key characteristics that most tangible assets have in common.
They are used as part of the business’s daily operations.
The business can obtain financing by using assets as collateral.
They depreciate over time but retain residual or scrap value.
They have a physical form that you can see or touch.
Tangible assets examples include things like factory equipment, company vehicles, and office supplies. Computers and other electronics also qualify as tangible assets, as does any company property.
Current vs. fixed tangible assets
Tangible assets fall under two categories: current and fixed or long-term.
Current assets are liquid. This category includes things like cash, securities, and accounts receivable. Although you might not always be able to see your business’s cash accounts, they’re still tangible rather than theoretical. Current assets are useful in calculating a company’s current ratio, or how well it would be able to cover its current liabilities.
Tangible fixed assets, by contrast, hold transactional value but they aren’t as liquid as cash. Examples of fixed tangible assets could include things like manufacturing equipment, real estate, office furniture, or vehicles. These are subject to depreciation, reducing in value over time.
You can record tangible fixed assets on the balance sheet using their original, or book value, and then apply a depreciation formula to account for this loss in value. They’re considered long-term assets because you need them for everyday business over time, rather than quickly liquidated.
Difference between tangible and intangible assets
We’ve touched on the difference between tangible and intangible assets above. While tangible assets are physical, intangible assets include any assets with more of a theoretical value. Examples of intangible assets include things like:
While some of these, like licenses, can be listed as an itemised value according to their purchase cost, others, like brand value, are generated during a company-wide valuation. Intangible assets are considered long-term rather than current.
How to calculate the value of tangible assets
When calculating the value of tangible assets, you need to look at how they’re recorded both on the balance sheet and income statement.
Most will start off recorded at their original, or book value, on the balance sheet. After this, they are transferred to the income statement using the following techniques:
Current assets should be organised by liquidity. The most liquid assets will appear in the highest position.
Fixed assets require a depreciation formula to be applied, recording the asset’s cost as an expense over the course of several years. For example, a computer is worth the most when you first start using it, after which time it depreciates in value. You would need to spread this cost out over its lifespan.
There are also several methods that can be used to determine your assets’ true market value, including the following:
Appraisal method: An appraiser assesses the current condition of all your assets, taking obsolescence and condition into account.
Liquidation method: The assessor determines the current value that your tangible assets would garner from a quick sale, or liquidation. This considers what you’d receive from all tangible assets if they were put up for auction today.
Replacement method: The replacement cost method calculates the value of your tangible assets by considering what the cost would be to replace them. It’s mainly used for insurance purposes.
What are net tangible assets?
To calculate the value of net tangible assets, you use the following formula:
Net Tangible Assets = Fair Market Value of Tangible Assets – Fair Market Value of Total Liabilities
This figure is used to determine if a company’s market share price is under or overvalued. Essentially, if you have a high net asset value, you have lower risk because your assets can easily cover your liabilities.
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