Tangible vs Intangible
Tangible and Intangible are terms very commonly used in accounting to refer to two types of assets. Difference between tangible and intangible is simple as tangible is something that has a physical existence and can be seen whereas intangible is something that cannot be seen. For example water is tangible while air is intangible. However, the real significance of these two terms is felt in the world of accounting where assets are divided into tangible assets and intangible assets. To ascertain the real worth of a company it is very important to differentiate between the two types of assets.
A tangible asset is anything that can be seen and has a physical presence such as cash, property, plant and machinery or investments. On the other hand, intangible assets are those that cannot be seen such as goodwill of a company, trademark, and intellectual property rights. These are things that cannot be seen but sometimes have more value than tangible assets. Both are assets however, and any accountant needs to keep track of all the assets of a company, whether tangible or intangible. The valuation of a tangible asset is easier as intangible assets vary a lot in their valuation and this fact has an impact on the total worth of a company. In a balance sheet, an accountant needs to break down the fixed assets of a company into tangible and intangible assets.
One other difference between the two types of assets lies in the manner in which the cost of these assets is calculated over a period of time. While tangible assets get depreciated (their value gets eroded over time), intangible assets are amortized. Long term assets such as plant and machinery, buildings and equipment etc, lose their value over time. This rule does not apply over land which appreciates rather than depreciate in value. It is easy to see the value of tangible assets in a balance sheet.
Intangible asset, though having no physical form may have more value than a tangible asset. For example, a patent that may cost a huge sum initially is utilized by the company for a period of 15 years and its competitors are barred from making the product during this period which allows the company to earn handsomely. This is why intangible asset is much more valuable than tangible asset.
However, whereas tangible assets can be bought and sold, intangible assets are difficult to sell in market. This is why it is so difficult to ascertain the real value of an intangible asset. If you have to, just imagine the real worth of the company without the patent and you will realize the importance of the intangible asset. Companies owning intangible assets realize the importance of intangible assets and try to make the most of them during their life time.
While the value of tangible assets reduces gradually, the value of intangible assets remains the same and suddenly falls to zero when it near its completion period.