Tangible and Intangible Assets - Research Paper Example

? Tangible and Intangible Assets There are two types of assets in business, intangible assets and tangible assets. Tangible and intangible assets also have different methods of calculating their rate of depreciation thus it is absolutely necessary for accountants to differentiate them. A person dealing in accounting needs to carefully understand these two types of assets in order to help him record them properly. Intangible assets cannot be seen or felt that is they are non-physical in nature and they are usually non-monetary. Intangible assets are basically the long term resources of the given firm, usually the legal rights of the firm including patents, trademarks, goodwill and copyrights. Intangible assets cannot be destroyed by fires or other tragedies and they usually add value to the company’s financial worth. Tangible assets are physical and identifiable and can be seen and touched. Since businesses are different they also have different tangible assets depending on their type of business. A company’s financial worth is determined by the amount of tangible assets that it has in its possession. Tangible assets can further be categorized into current and fixed assets. Current assets consist of assets that can be easily converted to cash/liquidated. An example is the firm’s bank accounts and its inventory (Hoffman, 2012). Fixed assets are not easily liquidatable and most generally depreciate with time except land. Fixed assets are usually used up in the production process and they may include machinery, equipments, vehicles, land and buildings. Financial recording of tangible and intangible assets is usually done differently, with the tangible assets further divided into current and fixed assets. A company has tangible Assets and intangible assets. Tangible assets can be seen and touched and tangible assets have physical form. Tangible assets are different for businesses and companies since all the businesses and companies are not identical. An immense amount of company’s worth is determined by tangible assets. This is very helpful when the company is on the market for sale or if the company is looking for a potential investor. Tangible assets can be fixed assets and they can also be current assets. Current Assets A company has these assets on hand and easily available. Companies can easily liquidate these assets. Current tangible assets would include inventory and bank accounts that a company or a business has. Fixed Assets These kinds of assets are exactly the opposite of the current assets. Fixed assets are depreciated over time and they are not easy to liquidate compared to current assets. Fixed tangible assets would include land, building, furnishings, art, historical treasure, and equipment. Tangible Assets Tangible assets have a physical form and can be seen and felt. As discussed above there are two types of tangible assets current and fixed. Current assets can be easily liquidated and converted to cash. They can also be used as collateral for the company to acquire loans. Current assets also have a shorter lifespan and are utilized in the daily operations of the company. Inventory or the stock falls under the current tangible assets and it usually has a life span of less than a year. A company’s inventory basically is the products it produces to sale or the goods it distributes at a profit (Capital Fixed Asset Guide, 2013). The inventory is recorded daily, weekly or monthly in the company’s balance sheet. To record the inventory as well as other current assets they allocate the expense of the asset to the year the business purchased the asset. Another type of current asset is the business bank account, and it is recorded in the same way as the inventory in the balance sheet. Fixed assets are recorded differently since they have a longer lifespan of more than a year. They are usually purchased to be used for a long time in the firm’s production process. Examples of fixed assets are buildings, land, equipments, machinery and company vehicles. Land houses all the companies’ assets. Unlike other fixed assets land does not follow the laws of depreciation, instead it appreciates with time. Buildings on the other hand are the physical structures containing all of the firm’s assets. Buildings also go against the law of depreciation as they appreciate with time (Pratt, 2013). Tangible assets are what ensure that the company gets flow of cash in its accounts and thus should be well maintained and the book keepers should always ensure accuracy in their recordings. Records are important considering that these assets are prone to depreciation, theft and other losses that they may emanate from natural or man-made disasters such as fires, floods and hurricanes. Good recording of tangible assets ensures that the company’s business goals and targets are comfortably met. Accuracy in recording is necessary to ensure that at any single time the company’s worth can be accurately calculated (Fox, 2013). In the case of assets of similar nature depreciation can be calculated through the straight line depreciation method, while assets of different nature are using the composite depreciated method. Multiple assets depreciation is calculated using the group depreciation method. This applies to equipments that are similar in nature and whose lifespan is almost similar.  Equipments, machinery and vehicles are long term investments for the firm and they depreciate with time. The annual depreciation of these fixed assets is calculated yearly to get their current worth after deducting the depreciation. The fixed assets are allocated on the year that they were in use. The year of purchase of a long term asset will be recorded as a current asset in that years balance sheet. How to Record Tangible Assets Accounting department of companies usually differentiate between the tangible assets and intangible assets. These assets are differentiated on balance sheets and other documentation. Fixed assets and Current assets are recorded differently as well. Fixed assets are allocated in the year in which that certain assets is in use or if the company is still utilizing it. A building that a company used and later rented it out would be a good example. The year a company purchased the assets would be the year that they would allocate their current assets. It is very important to know the different kind of tangible assets because it will help with accurate recording in financial statements. Tangible assets are in control by the company and they can deal with them how they see fit. These assets provide regular cash flow to a company and should be maintained. Tangible assets are very vital for the companies and they should be very well maintained. These assets are not immune to depreciation, theft and other kind of loss and damage. Tangible assets help company reach business goals and they also help company provide quality service. These assets should be maintained properly and recorded accurately because it shows an immense part of company’s worth. Intangible Assets A company or an organization has intangible assets and tangible assets. I have talked about tangible assets above and Intangible assets will be my primary focus here. I will be discussing different types of intangible assets and how to record them. U.S. GAAP and IFRS describes intangible assets as “nonmonetary asses without physical substance” (US 2011). Assets with no physical existence but identifiable, are called intangible assets. Intangible assets are also the long-term resources of an entity or an organization. The value of intangible assets is derived from the legal rights and by the value they add to other assets. This is very helpful when an entity is on the market for sale or if an entity is looking for a potential investor. An advantage that intangible assets have over tangible assets are that they can’t be destroyed by unforeseen events such as fire and hurricane. Intangible assets can be categorized in limited-life intangible assets and unlimited life intangible assets. Patents and copyrightsare limited life intangible assets. Trademarks and goodwill are considered as unlimited-life intangible assets. (FASB 2001) How to Record Intangible Assets Limited-life intangible assets are amortized over the period of their useful life (Accounting 2012). Patents are limited-life intangible assets. U.S patent usually lasts for 20 years. The value of the patent is determined by the way it was acquired. Patent can be developed within an entity and the cost associated with it would be research and development. The value of the patent would be acquisition cost if the patent is purchased. Patents can be no more than 20 years. Patent can be amortized by the time that has been left on patent’s term. Copyrights is another part of limited-life assets. Copyright is valued the same way as a patent. The value of the copyright will be determined by the cost to make the copyright. Copyright value will be the same as acquisition cost if the copyright is purchased. Cost of amortization will be the distribution cost for copyright. Goodwill is considered as an unlimited life intangible asset. Goodwill is the price of the company after the value of the net assets has been taken out. Goodwill cannot be amortized but it can be impaired (Fields 2002). Impairment of an intangible asset will decrease the value of that certain asset. Trademarks are also considered to unlimited life intangible asset. Trademark is used to identify a company through a symbol or a word. Trademarks do not amortize, they are impaired (Flignor 2006). During the sale of a company’s tangible assets the intangible factors tend to raise the value of the asset on sale, although the intangible asset itself is not on sale. What intangible assets have as an advantage over tangible assets is the fact that it is not physical and therefore can not be destroyed by factors such as water, tornadoes or fire. To classify intangible assets, we put them under life limit intangible assets and unlimited life intangible assets. Examples of unlimited life intangible assets include goodwill and trademarks and copyright.  How to Record Limited-Life and Unlimited life Intangible Assets Here, records of limited and unlimited lifespan will be discussed. In the case of Limited-life intangible assets, they are amortized within the period of life that they provide the maximum usage. Patents fall under limited life intangible assets and in the United States their life span is only 20 years. If the patent is purchased, the value of the patent will then be an acquisition cost. Since patents in the United States can only be limited to a life span of 20 years, they can therefore be amortized depending on the period left before the end of the 20 year term (Financial Accounting Standards Board United States, 2006). How a patent is acquired definitely determines its eventual value. When developing a patent within an entity, its cost is usually evaluated by research and then development A trademark is the unique identity of an organization or company that differentiates it from the others through symbols, words and logos. These too fall under intangible assets of unlimited life span. Just like goodwill, they can only be impaired and not amortized (Flignor et al., 2006). Goodwill is also taken as an intangible asset that is life unlimited. This is basically the price of an organization after the net assets value has been struck out. The difference between goodwill and other intangible assets is that it can only be impaired and not amortized (Fields, 2002).Through Impairment, this will ultimately reduce an intangible asset’s value and of the specific intangible asset or resource. Copyrights too fall under life limited assets and just as patents they are valued the same way. When valuing copyrights, they cost of developing the copyright always determines its eventual value. It is because of this case that the acquisition cost of the copyright will be equal to the cost of the copyright if any purchases are made. The copyright’s distribution cost is equal to the amortization cost of the copyright. Though intangible assets don’t exist physically, they are indefinable and play a very pivotal role in an entity’s existence. This is definitely because they are the assets of the entity in the long term. It is advised so as to be able to have accurate financial statements to differentiate between the different intangible resources available. It is paramount to record correctly trademark and goodwill and accordingly impairing them. Conclusion Both types of assets play a crucial role in ensuring the smooth running of an organization and its profitability. Good and accurate recording of the assets plus the annual depreciation should thus be properly calculated and recorded in financial books. This should be done regularly depending on the type of asset. Accurate recording of assets also ensure that the assets are well maintained thus help the organization to achieve its set goals and targets (Governmental Accounting, Auditing, and Financial Reporting, 2013). Good financial records ensure that a valuer can accurately value the worth of the company at any given period of time provided the documents are accurately and professionally documented.   Works Cited Hoffman, W. (2012).South-Western Federal Taxation and accounting. San Francisco: Mc Grawhill. Governmental Accounting, Auditing, and Financial Reporting. Retrieved 21 June 2013. Website: http://www.gfoa.org Kieso, D. (2010).Intermediate Accounting. New York: Bates Press. Pratt, J. (2013). International Accounting Standards. London: Oxford Press. "Capital Fixed Asset Guide." State Auditor's Office. Retrieved 31 May 2011. Website: http://sao.state.wy.us Financial Accounting Standards Board United States. (2006). Accounting Standards Codification. Fox, S. (2013). Income Tax in the USA. The American Accounting journal. Fields, G. (2013). "Accounting for new rule's impact." Chicago Tribune. Flignor, P and David, O. (2006). "Intangible Asset & Intellectual Property Valuation: A Multidisciplinary Perspective." World Intellectual Property Organization. US GAAP VERSUS IFRS." Ernst & Young. Ernst & Young, Dec. 2011. Web. 5 July 2013. . Read More