What Are Tangible Assets? Definition, Types & Examples
Gain clarity on the physical assets that form the foundation of business value and financial reporting.
Assets represent valuable resources controlled by an entity, acquired from past transactions, and expected to provide future economic benefits. Among the various types of resources, tangible assets stand out as a particularly important category, forming the physical foundation of many operations and investments.
Understanding Tangible Assets
Tangible assets are physical items that can be seen and touched, providing economic value to their owner. They are often subject to wear and tear over time. These assets are typically acquired not for resale in the short term, but rather for continuous use in generating revenue or supporting operations. They are fundamental to how businesses operate, enabling production, service delivery, or administrative functions. Examples include land, buildings, machinery, vehicles, and office equipment.
Classifying Tangible Assets
Tangible assets are commonly categorized based on their intended use and expected lifespan within a business, primarily falling into current or non-current classifications. Current tangible assets are those expected to be converted into cash, consumed, or sold within one year. Inventory, for instance, represents goods held for sale, such as raw materials, work-in-progress, and finished goods. Supplies, like office supplies or cleaning products, are also current tangible assets as they are consumed relatively quickly in daily operations.
Non-current tangible assets, often referred to as fixed assets or property, plant, and equipment (PPE), are resources held for long-term use, typically exceeding one year. These assets are not intended for sale but are instead used to produce goods, provide services, or for administrative purposes. Buildings house operations, while machinery and equipment facilitate production processes. Vehicles transport goods or personnel, and land provides the physical space for all these activities.
Tangible Versus Intangible Assets
The primary distinction between tangible and intangible assets lies in their physical existence. Tangible assets possess a physical form and can be touched and seen. Their value is often directly linked to their physical attributes and utility.
In contrast, intangible assets lack physical substance but still provide economic value and future benefits to their owners. These assets include patents, which grant exclusive rights to an invention, or copyrights, which protect original works of authorship. Trademarks, representing brand names or logos, and goodwill, reflecting the value of a company’s reputation and customer relationships, are further examples. The absence of a physical form necessitates different methods for their valuation and accounting treatment compared to their tangible counterparts.
Accounting for Tangible Assets
When a business acquires a tangible asset, it is recorded on the balance sheet at its historical cost, which includes the purchase price plus any costs necessary to get the asset ready for its intended use. This can encompass shipping, installation, and testing expenses. This accounting principle ensures that the initial value reflects all expenditures incurred to bring the asset into service.
For most non-current tangible assets, excluding land, their cost is systematically allocated over their useful life through a process called depreciation. Depreciation reflects the gradual wearing out, obsolescence, or consumption of the asset’s economic benefits. This allocation helps match the expense of using the asset with the revenue it helps generate. The accumulated depreciation reduces the asset’s carrying value on the balance sheet, representing its remaining economic value.