Tangible resources are physical items including cash, inventory, machinery, land or buildings. These items can be easily liquidated and have a set value. They are critical in accounting as they help a company understand it's financial standing when entered on balance sheets and financial statements. There are two types of tangible resources; fixed and current. These assets differ in how easily they can be converted to cash and how they are treated during the accounting process.
Tangible assets are physical goods that can be touched or seen, such as inventory and buildings, as opposed to intangible assets, such as patents or copyrights.
What Are Tangible Resources?
Tangible assets are things that have a physical form. They can be touched, seen or felt. As you may guess, the difference in tangible vs. intangible assets is that while tangible resources are things you can physically touch, intangible resources are nonphysical. Examples of intangible assets may include patents, trademarks, copyrights or brand recognition. Even goodwill towards a company can be considered an intangible asset.
Whereas tangible resources can be valued easily (though there are multiple ways to value a tangible asset), intangible resources can be much more difficult to place a value on as these are largely subjective. For example, a Frigidaire refrigerator has a set cost whether you use the appraisal, replacement value or liquidation method to evaluate it. On the other hand, a patent for a Samsung Galaxy phone is going to be completely subjective based on innumerable factors.
In companies dealing in physical goods, tangible assets make up the majority of the company's assets. When companies are more service- or creative-focused, intangible assets will often make up the majority of the company's assets. For example, Walmart's assets are mostly tangible, and Microsoft's are mostly intangible.
Types of Tangible Assets
There are two types of tangible resources, fixed (or hard) assets and current (or liquid) assets. A fixed asset is something held by a company for a long period that cannot easily be converted into cash. These assets can usually be depreciated over time. Machinery, buildings and land are all examples of fixed assets.
Current assets, on the other hand, are assets that can easily be converted into cash. These are usually only in the business for a short amount of time, generally under a year. Inventory, marketable securities and cash are all examples of current assets.
Tangible Assets and Balance Sheets
A balance sheet statement is made by totaling a company's total assets, both fixed and current. On a balance sheet, fixed, tangible assets are recorded as Property, Plant and Equipment or PP&E. These include the total of a company's fixed assets such as vehicles, machinery, office furniture, buildings etc.
Recording Current Assets
The money a company earns through tangible assets is listed on the income statement as revenue. Tangible current assets are listed by the cost spent in their acquisition, usually as recorded on a bill, receipt or invoice from the seller. For example, if you bought 500 units of cereal for $1 a box, your financial statement would record their value at $500. If you sold 300 units of cereal for $3 a box, you would have made $900 in revenue.
On the balance sheet, current assets are listed in order of liquidity, meaning items that could get converted to cash the fastest will be listed first. Generally speaking, the list of current assets will be listed as cash; including currency, petty cash and balances in checking accounts, short-term investments such as marketable securities, accounts receivable, inventory, supplies and prepaid expenses.
Accounting for Fixed Assets
When recording the cost for tangible, fixed assets, you should enter all costs associated with the item, which could include transportation, installation, legal fees, testing fees and insurance costs. For example, if you ran a restaurant and bought a new stove, you may have paid $1,000 for the stove, $100 for delivery and $150 for installation. When entering the item on your financial statement, you would list it as $1,250 ($1000 plus $100 plus $150).
Because tangible fixed assets have an anticipated lifespan of more than one year, they receive special treatment in the accounting process through the use of depreciation. The process of depreciation allows a company to allocate part of the asset's expense to each year of its expected useful life rather than listing the full amount in the year the asset was purchased. When using depreciation, you may choose to allocate the same amount each year or use an accelerated method, meaning you will take a larger depreciation the first few years and a smaller depreciation as time wears on.
Because these assets are expected to lose value as they age, the rate a company chooses to depreciate an asset may leave them with a value on the books that is different than the current market value of the item. For example, if you bought a new iPhone for $800 and chose to depreciate it using an equal value over four years, it would be worth $600 after the first year, but the actual market value could be closer to $300.
Importance of Tangible Assets
Tangible resources are critical to businesses. The fact that current assets can easily be liquidated into cash reduces risk within the business by always ensuring they have some way to pay their bills and stay solvent. As long as a company has more value in tangible assets than they do in money risked or owed, the business will be safe and steady.
Also important to a company's financial security is the fact that tangible resources can be used as collateral security in order to obtain loans. In fact, companies with more tangible assets tend to be able to borrow more from creditors as the creditors understand these assets are easier to claim when the company does face financial distress. That is why many companies with few tangible assets tend to borrow very little from creditors.
The depreciation of tangible assets also makes these resources important as it allows companies to get tax benefits year-to-year without spending additional cash flow.
Valuing Tangible Assets
There are three main ways to value a tangible asset: appraisal, liquidation and replacement cost. The appraisal method requires an appraiser to be hired to determine the true fair market value of the company's assets. The appraiser will take into account the current condition of the resources, whether they are up-to-date and the current market value of similar items.
The liquidation method requires hiring an assessor to estimate the minimum value assets would receive at an auction house, equipment seller or other places the company could quickly liquidate items into cash. This is useful for a company to know, even if they do not need to liquidate as it allows them to know the bare minimum value of their assets.
The replacement cost method is, as the name indicates, a way to value assets by what it would cost to replace them. This valuation method usually yields the highest estimated value, and it is used for insurance purposes in case the assets are destroyed through fire, flood or other covered loss.
Losses of Tangible Assets
Both current and fixed tangible assets can be affected by damage or by becoming obsolete. When this happens, the value of the asset will decrease, requiring an adjustment on the item's value in the balance sheet as well as on the income statement. A fixed tangible asset can be disposed of or sold off for a salvage value, which is the estimated value of the item if it was sold in parts.