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| Corporate Accounting Treatment |
What are tangible and intangible assets? -Difference with practical example:
Tangible and intangible assets are two major types of assets classified based on their physical existence.
1.Tangible Assets:
Definition: Tangible assets are physical, measurable assets that can be touched or seen. These are generally long-term assets used in operations and typically depreciate over time.
Examples:
Land: Real estate purchased by a company for building operations or expansion.
Buildings: Office complexes, warehouses, or factories.
Machinery: Equipment used in manufacturing, such as conveyor belts, printers, or heavy machinery.
Vehicles: Delivery trucks, company-owned cars.
Inventory: Finished goods or raw materials held for sale.
Accounting Treatment:
Tangible assets are recorded on the balance sheet at their purchase price and depreciated over their useful lives, except for land, which does not depreciate.
2.Intangible Assets:
Definition: Intangible assets are non-physical assets that have value but cannot be touched. They provide long-term value to a business and typically do not depreciate, but they may amortize.
Examples:
Goodwill: The premium paid when a company is acquired, representing intangible value such as brand reputation.
Patents: Legal rights granted to inventors to exclude others from making, using, or selling an invention for a specific period.
Trademarks: Logos, symbols, or brand names that distinguish a company's products or services.
Copyrights: Legal rights protecting the use of artistic, literary, or musical works.
Franchises: The right to operate a business using the franchisor's system and brand.
Accounting Treatment:
Intangible assets are generally amortized over their useful life, except for some items like goodwill, which are tested for impairment annually instead of amortization.
Key Differences:
Physical Existence: Tangible assets have physical form (e.g., land, buildings), while intangible assets do not (e.g., goodwill, patents).
Depreciation vs. Amortization: Tangible assets (except land) are depreciated, whereas intangible assets are amortized or subjected to impairment tests.
Lifespan: Tangible assets typically have a predictable useful life; intangible assets can have indefinite or definite useful lives.
In Finally:
Both tangible and intangible assets are critical to a company's financial health and performance, but they are treated differently in accounting practices.