The term “assets” refers to everything a business possesses or has. Cash, inventories, cars, equipment, buildings, and investments are examples of tangible assets. Accounts receivable, prepaid expenditures, patents, and goodwill are examples of intangible assets that do not exist in physical form.
To comprehend the worth of an asset, one must first comprehend its prospective long-term advantages. Intangible assets are often more valuable in the long run than physical assets since tangible goods depreciate faster. For example, a patent for a breakthrough technology may continue to produce revenue for decades, while the goods based on that invention may only be valuable in inventory for a limited period of time.
Tangible assets are an individual’s or a business’s possessions that are genuine and tangible, rather than imaginary. They are contrasted with non-tangible possessions that a person or company may have. Copyrighted ideas, patents, and intellectual property are examples of intangible assets. Though these items may be financially advantageous in the future, they are not presently something that can be marketed for a high profit in most instances.
Most physical assets, on the other hand, may be easily converted to cash or are already cash. Funds in your bank account are tangible, as is anything you own, such as automobiles, homes, or boats. These tangibles are typically the kinds of collateral you offer for a loan, particularly if you wish to obtain one. Most banks will not provide loans to individuals who do not have physical assets, even if they have intangible assets with the potential to generate income in the future.
Tangible assets are classified into two types:
- Current Assets: Items such as cash, inventories, and marketable securities are examples of current assets. These goods are usually utilised within a year and may therefore be sold more easily to generate funds for emergencies.
- Fixed assets: Fixed assets are non-current assets that a firm employs in its business operations for a period of longer than a year. They are classified as Property, Plant, and Equipment (PP&E) on the balance sheet and include assets such as vehicles, equipment, office furniture, and buildings. Revenue is the amount of money generated by a business utilising physical assets and is reported on the income statement. Fixed assets are required to keep the company running continuously.
Tangible Asset vs Intangible Asset
Tangible assets serve as the foundation of a company’s operations by providing the tools for it to create products and services. Because tangible assets are physical assets, they may be harmed by naturally occurring incidents. Non-physical assets that contribute to a firm’s future value or worth are known as intangible assets, and they may be much more precious than tangible assets. Both of these assets are first reported on the balance sheet, which assists investors, borrowers, and banks in determining the company’s worth.
More on Tangible and Intangible Assets
The majority of physical assets are easily convertible to cash or are already cash. Money in your bank account is tangible, as is anything you own, such as automobiles, homes, or boats. These tangibles are typically the kinds of collateral you offer for a loan, particularly if you wish to obtain one. Most banks will not provide loans to individuals who do not have physical assets, even if they have intangible assets with the potential to generate income in the future.
When a company requests a loan, its tangible and real assets may be considered. Business inventory, property held by the company, and equipment owned by the company are all examples of physical assets for a business. A timber business’s actual assets might comprise its present lumber supply, any equipment used to manufacture lumber, the facility where the company works, and any cash the firm mainly has.
When trying to obtain a loan, banks may consider only certain items to be suitable collateral. In the preceding example of the timber business, a bank may not see inventory or equipment as an appropriate method of ensuring loan repayment. To begin with, inventory is subject to change, and there is nothing preventing the timber business from selling its material. Second, if the business stops operations, the lender is forced to liquidate real assets. The lender may not want to go to the effort of selling timber or equipment and is more likely to look at physical assets such as cash balances and real estate assets since cash is simple to take and real estate is relatively straightforward to sell.
However, when a business is sold, actual assets are often included in the selling price. A lumber business with modern equipment and a large stack of timber will command a greater price than a basic warehouse with old machines and no inventory. It’s similar to selling your home, vehicle, and boat all at once rather than selling each item separately.
Intangible assets may also be useful. Some intellectual property, patents, or innovations that are not yet in operation may be so appealing in terms of prospective profit margin that they are worth buying or even lending money so that a person may develop the intellectual property to generate physical assets such as cash. Some businesses are purchased and sold based on their patents or earning capacity, and they command a premium price because of these potential earnings, even if the company’s physical assets are not highly valued at the time.
In the contemporary world, intangible assets are the most important determinants of values. These assets are used to determine the value of both large companies and startups. This emphasizes the need for banks to develop a framework that would enable them to borrow against such assets.
At the time, all bank regulations forbid the use of such assets in the form of collateral. When they are collateralized, they are only worth a fraction of their original value. Banks will lose revenue to venture capital funds and non-banking financial companies that are permitted to make such loans unless they find a method to lend money against these assets.