Tangible assets form a crucial part of maintaining your business's financial health. They are part of calculating the net worth as well as maintaining the balance sheet. This is why we've compiled this short guide to tangible (and intangible) assets and how to calculate them.
Tangible assets - explained
Tangible assets refer to any business assets that have a clear monetary value and take a physical form. This could, for example, be a company car, business property, office supplies, factory equipment, or IT equipment. By contrast, intangible assets merely have a theoretical value. This includes eg patents and intellectual property.
Tangible assets are characterized by several things - they are subject to depreciation, retain residual value, are used in a company's daily operations, have a physical form and the company can obtain financing by using assets as collateral.
Categories of tangible assets
Tangible assets fall under two categories: current and fixed or long-term.
- Current assets refer to anything liquid - eg cash, accounts receivable, and securities. While they may not always take a conventional physical form, your company's accounts are still tangible assets.
- Fixed assets refer to assets that are not liquid, but have transactional value. This includes physical entities, such as equipment, real estate, office furniture, or vehicles. Fixed assets are subject to depreciation which means they are reducing in value over time. When noting these long-term assets in your balance sheet, you should apply a depreciation formula to account for this loss in value.
Intangible assets refer to any assets whose values are more theoretical. This could eg be copyrights, licenses, patents, brand value, and trademarks. Some of the intangible assets' value is itemized, meaning it is set according to eg purchase cost, others (eg brand value) are determined during a company-wide valuation.
Calculating tangible assets
- An appraiser could assess the current condition of your assets, taking obsolescence into account.
- Another option is for the assessor determining the current value your assets could make in a quick sale or liquidation.
- Also, you could apply the replacement cost method which calculates the value of your tangible assets by considering what the cost would be to replace them.
The formula to calculate net tangible assets is as follows: Net Tangible Assets = Fair Market Value of Tangible Assets – Fair Market Value of Total Liabilities.
The result of this equation can help show whether your business's market share price is under or overvalued. If you have a high net asset value, you have a lower business risk because your assets can easily cover your liabilities.