While the physical makeup of a computer is different than that of a building and a delivery truck is larger than a moving dolly, such physical differences in company assets are not relevant for purposes of accounting. Each asset, whether or not it can be described in terms of size, shape or function, is subject to ownership rules and accounting principles. The purpose of classifying any asset -- tangible or intangible -- from an accounting perspective is to justify business decisions, ascertain the worth of a company and allow business owners to receive the benefits of asset ownership.
Tangible and intangible assets are the major asset classes represented on a company's balance sheet. A tangible asset represents an opportunity to earn an economic benefit through the production or distribution of goods, the provision of services or the rental of the asset to others. Tangible assets, including equipment, land and vehicles, can be described in terms of their physical makeup. In addition, because tangible assets are often purchased, they can be valued at cost. Some tangible assets, such as buildings and machines, depreciate over time and receive special treatment from an accounting perspective to best match the cost of the asset to the revenues generated by the asset.
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Purpose of Tangible Assets
Tangible assets aren't sold to customers. Instead, these assets are used in the operation of a business to produce goods or provide a service. Businesses also use these assets as collateral to obtain loans or sell the assets to improve the company's cash flow. Tangible assets increase a company's market value.
Both tangible and intangible assets serve as a source of future economic benefits for a business. Unlike tangible assets, however, intangible assets lack a physical form. For example, patents for hand-held mobile radio telephone technologies and a company's brand name are valuable intangible assets that enable a company to generate significant revenues and profits over time. These and other intangible assets, such as intellectual property and goodwill, are assigned a market value based on their expected economic benefit to a company -- the anticipated income to be generated by the asset. The costs of the assets are amortized during the asset's useful life or legal life.
Purpose of Intangible Assets
Intangible assets, such as patents, trademarks or copyrights, are not used in the production of a product or service. Intangible assets, however, can be essential to the continued operation of a company. The difference between a price paid for a company and the value of its tangible assets represents the value of the company's intangible assets, including patents, brand names, customer loyalty and copyrights.