Table of Contents
Tangible and Intangible Assets: Definition and Difference
- CLFI Team
- 4 min read
Businesses rely on a wide range of resources to generate value. Some are physical, like machinery and buildings. Others are non-physical, like brands, patents, and software. In accounting terms, these resources are grouped as tangible and intangible assets. Understanding the difference between tangible and intangible assets helps explain how value is created, how it is reported on the balance sheet, and how it is gradually recognised as an expense through depreciation or amortisation.
Table of Contents
- What Are Assets in Accounting?
- Tangible vs Intangible Assets — Key Differences
- Example: Recording Tangible and Intangible Assets
- In Practice
What Are Assets in Accounting?
In simple terms, an asset is a resource controlled by the business that is expected to bring future economic benefits. Accounting divides assets into several types of assets, including current assets (such as cash and receivables) and non-current assets (such as property, equipment, and intellectual property). Within non-current assets, the main distinction is between tangible assets, which have a physical form, and intangible assets, which do not but still carry measurable value.
Definition:
Tangible Assets
Long-term assets with physical substance, such as buildings, machinery, vehicles, or equipment. They are recorded on the balance sheet at cost and typically depreciated over their useful lives.
Definition:
Intangible Assets
Non-physical assets that provide economic benefits, such as patents, trademarks, licences, and certain software. They are recognised on the balance sheet when they meet specific criteria and are usually amortised over their useful lives.
Tangible vs Intangible Assets — Key Differences
While both tangible and intangible assets are used to generate income, they differ in form, valuation, and how they are expensed over time. The table below summarises the main distinctions.
| Aspect | Tangible Assets | Intangible Assets |
|---|---|---|
| Physical form | Physical; can be seen and touched. | Non-physical; no visible form. |
| Examples | Buildings, machinery, vehicles, equipment. | Patents, trademarks, licences, purchased software. |
| Balance sheet category | Property, plant and equipment (PPE) or similar. | Intangible assets. |
| Expense recognition | Depreciation charged over useful life. | Amortisation charged over useful life (for finite-lived intangibles). |
| Valuation challenges | Usually based on purchase cost and observable wear. | Often harder to measure; relies on legal rights, contracts, or acquisition price. |
Practical example of Recording Tangible and Intangible Assets
To see how tangible and intangible assets work in practice, consider a business that buys a machine and a software licence. Both are long-term assets, but they will be recognised and expensed slightly differently. The following exercise walks through the journal entries, ledger postings, and the effect on the balance sheet.
Recording Tangible and Intangible Assets
How asset purchases and subsequent depreciation or amortisation appear in the accounts.
Suppose a business buys a machine for £40,000 (tangible asset) and a three-year software licence for £9,000 (intangible asset). Both are paid in cash. The machine will be depreciated over five years; the software will be amortised over three years.
The business now controls two non-current assets: a tangible asset (machine) and an intangible asset (software). Cash decreases by the total amount paid.
Post the initial entries to the ledgers
| Machinery (Tangible Asset) | ||
|---|---|---|
| Date | Debit | Credit |
| 01 Jan 2025 | £40,000 | — |
| Balance | £40,000 (Debit) | |
| Software Licence (Intangible Asset) | ||
|---|---|---|
| Date | Debit | Credit |
| 01 Jan 2025 | £9,000 | — |
| Balance | £9,000 (Debit) | |
Both tangible and intangible assets appear as debit balances on the balance sheet, reflecting resources controlled by the business.
Record one year of depreciation and amortisation
| Account | Debit | Credit |
|---|---|---|
| Depreciation Expense | £8,000 | — |
| Amortisation Expense | £3,000 | — |
| Accumulated Depreciation – Machinery | — | £8,000 |
| Accumulated Amortisation – Software | — | £3,000 |
Check the year-end carrying values
| Asset | Cost | Accumulated Depreciation/Amortisation | Net Book Value |
|---|---|---|---|
| Machinery (tangible) | £40,000 | £8,000 | £32,000 |
| Software Licence (intangible) | £9,000 | £3,000 | £6,000 |
Learning takeaway
This example shows how tangible assets are depreciated, while intangible assets are amortised. The accounting treatment is different in name, but the principle is the same: spreading the cost of long-lived assets over the periods that benefit from them.
Interpretation. Tangible and intangible assets are both central to how businesses create value, yet they behave differently in financial reporting.
Tangible assets often relate to operational capacity, while intangible assets frequently capture legal rights, technology, or brand value.
Recognising how each is recorded, depreciated, or amortised helps readers understand what sits behind the asset totals on the balance sheet.
In Practice
In practice, the mix of tangible and intangible assets tells a story about a company’s business model. Asset-heavy businesses, such as manufacturing or logistics, will show significant tangible assets in property and equipment, with visible depreciation charges. By contrast, technology, media, and pharmaceutical firms often rely heavily on intangible assets such as software, patents, and brands. Understanding this difference helps managers and investors interpret how a company generates value and which resources are critical to its strategy.
These asset types also influence financial analysis and risk assessment. Tangible assets can often be used as collateral, affecting financing options and capital structure decisions. Intangible assets, while harder to value, may drive pricing power, customer loyalty, and future growth. Depreciation and amortisation feed directly into measures such as EBITDA, operating profit, and return on assets (ROA), so understanding what sits behind these charges is essential when comparing companies or evaluating performance trends.
Definition
Balance Sheet
A financial statement showing what a business owns and owes at a specific point in time, summarising assets, liabilities, and equity. For a step-by-step guide to interpreting it, read How to Read a Balance Sheet – Finance for Non-Finance Managers .
Programme Content Overview
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Chart: Percentage weighting of each core course within the CLFI Executive Certificate curriculum.
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