Intangible assets have value but they aren't physical. They increase the worth of your company, but their value tends to be more subjective than that of tangible, or physical assets. Some intangible assets can be bought and sold, much like tangible assets. However, tangible assets such as machinery and real estate are more likely to retain their value and usefulness when they change ownership because they are more adaptable. A building can be used in a variety of ways. A mailing list of people interested in cars or surfing has a more limited appeal.
Examples of Intangible Assets
Whether or not you list them on your balance sheet, every business has intangible assets. The collection of knowledge and systems that keeps your business running smoothly is an intangible asset, including recipes for a food business and protocols for a manufacturing business. Patents are intangible assets, along with mailing lists, trademarks and brand names with widespread recognition. Goodwill is an intangible asset as well, representing the overall reputation your company has built over time, including customer relationships, community partnerships and word of mouth referrals.
Reporting Intangible Assets as Expenses
If you buy an intangible asset such as a patent or a mailing list from another company, the price you pay is the amount you record as a deductible expenditure. If you invest company resources in developing an intangible asset from scratch, you have some discretion in deciding whether to expense your investment immediately or capitalize it over time. Some intangible assets, such as systems and customer relationships, are developed over the normal course of your work days so it makes the most sense to simply record them as part of larger payroll and operating costs. But if your business directs dedicated resources and expenditures towards developing an intangible asset, you may prefer to capitalize it over time for the long-term tax benefits. Patents and research and development projects can take considerable investments that can be clearly and sensibly tracked and treated as long-term investments.
Reporting Intangible Assets on Your Balance Sheet
Intangible assets that you buy from other businesses definitely belong on your company balance sheet and can be recorded according to the amount you paid for them. Similarly, patents, which require considerable investment, can be recorded at cost. Propriety knowledge and goodwill are more subjective and you can use discretion and judgment calls when deciding how to record them, as long as you can back up the chain of reasoning that went into your decision. When preparing a balance sheet to show to an investor or to someone interested in buying your business, it's a good idea to show these intangible assets at a higher but still realistic value.
Devra Gartenstein founded her first food business in 1987. In 2013 she transformed her most recent venture, a farmers market concession and catering company, into a worker-owned cooperative. She does one-on-one mentoring and consulting focused on entrepreneurship and practical business skills.