Assets provide a comprehensive view of a business’s net worth, and to keep them in order, an effective asset management system is essential. Within this system, all assets are categorised. They can be tangible or intangible, current or fixed. But what exactly does the term intangible assets mean and why is it important to understand?
What are tangible assets?
If something is tangible, it is perceptible by touch. Within the realm of business assets, a tangible asset is just this; an asset with real transactional value and, usually, a physical form. Tangible assets are the most basic type of asset listed on the balance sheet and typically account for the majority of an organisation’s total assets.
Tangible assets examples
A tangible asset can be absolutely anything of value with a physical form. Some common tangible assets examples include:
Real estate property
Tangible assets vs. intangible assets
In accountancy, tangible and intangible assets are the two main categories of assets. Unlike tangible assets, intangible assets don’t physically exist. Examples of intangible assets include goodwill and a company’s brand name, along with intellectual property such as patents, copyrights, trademarks, and trade secrets. Although these assets don’t have a physical form, they still have monetary value because they represent potential business revenue. Another way of putting it is that tangible assets have a transactional exchange value, while intangible assets have a theorised value.
Tangible current assets and tangible fixed assets
Tangible and intangible assets can be either current or fixed. Current assets are assets that are expected to be converted into cash quickly, whereas fixed (also known as non-current) assets are a company’s long-term investments. So, you have tangible current assets, such as cash and accounts retrievable, and tangible fixed assets, which would include your business premises, equipment and inventory.
Net tangible assets and asset valuations
Net tangible assets are a company’s total assets (minus intangible assets and liabilities), which are calculated to provide a rough assessment of the business’ economic value. Net tangible assets are determined through a tangible asset valuation, which works as an appraisal.
Various methods are employed to value assets. Most widely used are the cost method, which bases the asset’s value on the historical price for which it was bought, and the market value method, which bases the value of the asset on its market price or projected price. There’s also the base stock method, which requires a business to keep a level of stocks whose value is assessed based on the value of a base stock; and, last but not least, the standard cost method, which uses expected costs instead of actual costs.
Why are asset valuations important in business?
As a company, carrying out an asset valuation is one of the most important things you can do. Why? Well, there are several key reasons, including:
Price: If you are purchasing or selling an asset, an asset valuation will help you to identify the right price. This means you won’t overpay or accept a lower price than is deserved.
Mergers: When two companies merge, or if a company is taken over by a new owner, asset valuation will help both parties determine the value of the business.
Loans: When you apply for a loan, the financial institution may require collateral, in the form of assets, to back secured debt. Asset valuation will determine whether the loan amount is fully covered.
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