Before explaining tangible assets and intangible assets, let’s recall the definition of asset. Asset is a resource controlled by an entity from which the entity expects to obtain economic benefits in future.
Depending upon the nature of resources, accounting frameworks have classified assets into various types for better presentation and analysis. This classification of tangible assets and intangible assets is based on respective physical substance of the assets. Let’s separately discuss these types of assets.
All those assets which have a physical substance or existence are known as tangible assets. They can be tangible non-current assets or tangible current assets depending upon their respective lives or timelines as discussed in the chapter “current assets and non-current assets”. We live in physical world and majority of the assets owned by a business are usually tangible assets, so we do not usually use the world tangible that often. However, this classification is important to understand because there are some resources which do not have physical substance, yet they are a source of inflow of economic benefits for an entity.
Some common examples of tangible assets are given below:
Tangible non-current assets
- Property, plant and equipment
- Investment properties
Tangible current assets
- Cash and bank balances
All those assets which do NOT have a physical substance or existence are known as intangible assets. For instance, an entity has purchased a license to operate a specific type of business in a jurisdiction for ten years. This license has no physical substance, it is just a permission from the Government of that jurisdiction allowing the entity to operate. However, it is still beneficial as the entity will do business and earn revenues based on that license.
Some common examples of intangible assets are given below:
- Patents and licenses
- Software programs