What is Tangible Assets: Types, Pros and Cons

What is Tangible Assets: Types, Pros and Cons

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Jaya
Jaya Sharma
Assistant Manager - Content
Updated on Mar 26, 2024 17:37 IST

Tangible assets are those types of assets that hold finite monetary value and are available in physical form. These can be transacted in lieu of certain monetary value.

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In this article, we will be discussing the different types of tangible assets and their associated advantages in detail.

Table of Contents

What is a tangible asset?

A tangible asset is a type of physical asset in a physical form. Unlike an intangible asset, it can be seen, touched, and quantified. Examples of tangible assets include buildings, land, machinery, inventory, and cash. These assets are considered tangible because they have a physical presence and can be used in the day-to-day operations of a business. Tangible assets can be easily valued and can serve as collateral for financing, making them an important component of many businesses.

Importance of Tangible Assets

Tangible assets are important to businesses for several reasons:

  • Physical presence: Such assets such as buildings, land, and equipment provide a physical presence for a business, helping to establish its presence in the community and make it easier to conduct operations.
  • Production support: Such assets such as machinery and inventory support the production and distribution of goods and services, helping businesses to meet customer demand and generate revenue.
  • Collateral for financing: These assets can be used as collateral for financing, providing a way for businesses to secure loans and other forms of financing based on the value of their physical assets.
  • Long-term value: These assets such as real estate can provide long-term value to a business, appreciating in value over time and providing a potential source of future revenue or sale.
  • Risk management: These can help businesses manage risk, such as by insuring physical assets against damage or loss, providing a way to mitigate the impact of unforeseen events.

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Types of Tangible Assets

There are two main types of tangible assets based on usage and liquidity:

1. Fixed Assets

Fixed assets are long-term physical assets that a business owns and uses in its operations. These assets are expected to provide value to the business for several years and are typically not intended for sale. Examples of fixed assets include buildings, land, machinery, vehicles, furniture, and fixtures. Fixed assets play an important role in a business’s operations and financial health.

These assets provide a foundation for long-term growth and stability. Effective management of fixed assets, such as regular maintenance and replacement planning, is critical to ensuring their continued value to the business. Fixed assets can also serve as collateral for financing, making them an important component of a business’s overall financial position.

2. Current Assets

Current assets are short-term physical assets that a business owns and expects to convert into cash within a year. These assets are critical for a business’s day-to-day operations, as they help to fund ongoing expenses and support the production and sale of goods and services. Examples of current assets include inventory, accounts receivable, prepaid expenses, and cash. 

Inventory refers to the products or materials a business has on hand and available for sale. Effective management of current assets, such as monitoring inventory levels, collecting accounts receivable in a timely manner, and maintaining adequate cash reserves, is critical to ensuring a business’s ongoing operations and financial health.

Here are examples of current assets:

  1. Cash and Cash Equivalents: This includes physical currency, bank accounts, and money market funds. Cash equivalents are highly liquid investments with short maturities, usually 90 days or less.
  2. Accounts Receivable: Money that customers owe to businesses for goods or services delivered on credit. This is typically collected within a short period, like 30-90 days.
  3. Inventory: Items that a business intends to sell. This category can be subdivided into raw materials, work-in-progress, and finished goods.
  4. Short-term Investments: Investments that are expected to get converted into cash within a year, such as stocks, bonds, and certificates of deposit.
  5. Prepaid Expenses: Payments that are made in advance for goods or services to be received in the future. Examples include prepaid rent, insurance premiums, and taxes.
  6. Marketable Securities: Financial instruments that can be quickly converted into cash at a reasonable price. These are similar to short-term investments but are typically traded on a public exchange.
  7. Supplies: Operating supplies that are consumed within a year, such as office supplies, maintenance materials, etc.
  8. Notes Receivable: Short-term loans made to other entities, expected to be repaid within one year.
  9. Accrued Revenues: Revenues that have been earned (through delivery of goods or services) but not yet received in cash.
  10. Other Current Assets: This can include various other short-term assets not categorized above, such as tax refunds receivable, current portion of deferred tax assets, and short-term advances to employees.

Advantages of Tangible Assets

Tangible assets offer a range of advantages to businesses that effectively manage and leverage them. Here are some of the key advantages:

  1. Collateral for financing: Tangible assets can be used as collateral for financing, providing a way for businesses to secure loans and other forms of financing based on the value of their physical assets.
  2. Depreciation tax benefits: Tangible assets can be depreciated over time, which can provide tax benefits for businesses.
  3. Physical presence: Tangible assets, such as buildings, land, and equipment, provide a physical presence for a business, establishing its presence in the community and making it easier to conduct operations.
  4. Production support: Tangible assets, such as machinery and inventory, support the production and distribution of goods and services, helping businesses to meet customer demand and generate revenue.
  5. Long-term value: Tangible assets, such as real estate, can provide long-term value to a business, appreciating in value over time and providing a potential source of future revenue or sale.
  6. Risk management: Tangible assets can help businesses manage risk, such as by insuring physical assets against damage or loss, providing a way to mitigate the impact of unforeseen events.

Disadvantages of Tangible Assets

While these assets offer many advantages to businesses, they also come with some disadvantages. Here are some of the key disadvantages:

  • High initial cost: These can be expensive to acquire, which can place a significant burden on a business’s finances.
  • Maintenance costs: These assets require regular maintenance to remain in good condition and retain their value, which can add to the cost of ownership.
  • Depreciation: Such assets depreciate over time, meaning their value decreases as they age, which can result in a loss of value for the business.
  • Vulnerability to damage and loss: These assets can be vulnerable to damage and loss, which can result in costly repairs and replacement.
  • Limited flexibility: Assets, such as real estate, can be difficult to liquidate quickly, which can limit a business’s flexibility in responding to changing market conditions.
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FAQs

What distinguishes tangible from intangible assets?

While intellectual assets, like patents or trademarks, have no physical form, tangible assets, like buildings and machinery, are tangible and can be handled.

How do tangible assets get their value?

The purchase price of tangible assets less any depreciation (in the case of fixed assets) or the current market value (in the case of current assets like inventory) are typically used to calculate their value.

How does depreciation impact tangible assets?

The accounting procedure for distributing a tangible asset's cost over its useful life is called depreciation. It displays how the asset has been used or worn over time.

Can the value of tangible assets increase?

In contrast to normal depreciation, certain tangible assets, such as land and specific real estate, can, in fact, increase in value with time.

Why do tangible assets matter in a business setting?

In addition to being necessary for daily operations and loan acquisition (as security), tangible assets also raise a company's total value and productivity.

About the Author
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Jaya Sharma
Assistant Manager - Content

Jaya is a writer with an experience of over 5 years in content creation and marketing. Her writing style is versatile since she likes to write as per the requirement of the domain. She has worked on Technology, Fina... Read Full Bio