It can be intangible or tangible as it can be in the form of services or goods

If you're in the business of selling things to people or other businesses, most of those things will be objects with a real physical presence. Those are referred to broadly as tangible goods, but a second category – intangible goods – increasingly drives the economy. These don't have a physical presence, which can make them advantageous for startup businesses.

Tangible vs. Intangible Goods

Tangible goods are most of the things that fill your life, from the appliances – "white goods" – in your kitchen and laundry room, to the electronics in your office, to the baked goods and coffee cups in your break room. Intangible goods are different because they have no physical existence. They're things like intellectual property, licensed rights or websites, which can be bought and sold but not touched or handled.

If you're contemplating a startup business, selling intangible goods as part of all of your product mix can be a good strategy. You won't need to warehouse or handle them, so you save on physical space and labor costs, and adding to your inventory is often just a matter of placing an order electronically. That makes for a pretty uncomplicated supply chain and an efficient business.

Your Phone Is Full of Intangible Goods

If you want a perfect example of intangible goods, reach for your phone. The phone itself is a tangible good with a physical existence and probably a number of accessories as well. The phone won't operate without an operating system, though – hence the name – and both iOS and Android are intangible goods.

So are all the apps, like your games, favorite social-media apps and work-related collaborative software, which make your phone yours, as opposed to anyone else's. You can't fold them, you can't put them on a shelf and you can't hold them in your hand except in the sense that they're inside your phone. They have no physical reality, and that's what makes them intangible.

Intangibles Include Media Content

Apps aren't the only intangible goods on your mobile device. Does your phone hold a big chunk of your music collection? If so, those digital files are another intangible. Once upon a time, they'd have been records, which have a physical existence, but the rise of digital content means that the music itself – or other intellectual property – doesn't need to become a physical object.

The same is true for any movies or books you own on Amazon or other digital service and have downloaded to your device. Even copyrighted photos count as intangible goods. You can print them, and the print is tangible, but you've actually licensed the rights to the photo rather than the photo itself. You don't have to be Amazon-sized to act as a distribution channel for content creators, licensing their books or music and marketing them to a specific niche.

All Those Wonderful Experiences

Whenever retailers gather to discuss their woes, a common theme is that millennials, and increasingly other generations as well, like to spend their money on experiences rather than things. That's the difference between tangible and intangible goods, in a nutshell. What's on your own bucket list? Chances are that it's light on objects and heavy on memorable experiences. Climbing Kilimanjaro, diving on the Great Barrier Reef, seeing the concert of a lifetime or eating at the world's best restaurant are very physical activities, but you're not paying for the physical part of it.

If you only want to fill your belly, you can do that at any fast food chain. When you eat at a top restaurant, you're really paying for the experience: the ambiance, the world-class service and most importantly the breathtaking creativity of a chef like Rene Redzepi or Joan Roca. Those are things that can't be folded into your pocket or displayed on your mantel, so that meal and that tour are also intangible goods. Building at least part of your business – or part of your marketing plan – around experiences, rather than the actual products, capitalizes on that trend.

Assets include everything your business owns. Tangible assets are generally anything you can physically touch—from inventory to buildings to copying machines. Intangible assets, meanwhile, are anything of value that you can’t physically touch such as trademarks, domain names, and the goodwill you’ve built up around your company’s reputation.

In many cases, a company’s intangible assets are more valuable than their tangible assets. Think of companies whose work involves the development of intangible products such as computer software and technology solutions. Think also of technology-based, social, and community platforms whose value resides mainly in the value of the network, the brand, and the user base.

Key Takeaways

• Tangible assets are usually physical objects (like equipment and inventory) while intangible assets are valuable assets that can’t be touched (such as trademarks).
• Both tangible and intangible assets have value and can be bought and sold.
• It is easier to establish the value of a tangible asset than an intangible asset.
• While the difference between tangible and intangible assets seems obvious, it may take an expert to distinguish between the two and account for each appropriately.

What’s the Difference Between Tangible and Intangible Assets? 

The difference between tangible and intangible assets may seem obvious: if you can touch it, it’s tangible; if you can’t, it isn’t. However, in an era when apps and influence can be more valuable than spark plugs or apples, the difference isn’t always so clear-cut. Here are some of the key distinctions between the two:

 Qualities of Tangible Assets Qualities of Intangible AssetsCan be physically touchedCannot be physically touchedEasier to value and account for because of clearly defined cost and expected lifespan.Include goodwill and intellectual propertyEasier to sell for the purpose of raising cashHave perceivable valueCan be depreciatedCan be amortized Have residual valueHave no residual valueCan be destroyed by flood or fire and need general business or liability insuranceCan be compelling longer-term investments Can be destroyed by poor decision-making and may need specialized insurance

Tangible assets also fall into two groups: current and fixed assets. Current assets are used in day-to-day business operations and can be used up or converted into cash within a single year. By contrast, fixed assets are larger items like buildings, land, and major equipment that can depreciate over time.

Like tangible assets, there are two distinct groups of intangible assets: definite and indefinite. Definite intangible assets are time-limited while indefinite intangibles are not. Here are examples of both types of assets. 

Examples of Current Tangible AssetsExamples of Fixed Tangible AssetsExamples of Definite Intangible AssetsExamples of Indefinite Intangible AssetsInventoryBuildingsLeasesGoodwill of customersInvestments LandPatentsGoodwill of employeesCashMajor equipmentTrademarksResearch findings  CopyrightsAlgorithms  ContractsIntellectual property  Accounts receivableBrand name

Physical and Nonphysical Property

In general, it’s easy to distinguish between physical and non-physical properties. 

Note

Since physical property can actually be touched, it can be easier to value or sell. Non-physical property, however, can’t be touched, thus making it more difficult to do the same. 

But as digital transactions have become the norm, it can become trickier to distinguish between physical and nonphysical property. For example:

• Streaming music and videos are considered to be intangible property, but of course they are valued, bought, and sold every day.
• Stock investments are considered to be tangible assets, but they have no physical form; they are simply listed and managed as digital assets.
• Cryptocurrencies, like Bitcoin, behave like other investments but for the purposes of Generally Accepted Accounting Principles (GAAP), do not meet the test for being tangible assets.

Depreciation vs. Amortization

The value of most tangible assets decreases over time due to age, wear and tear or obsolescence. This process is known as depreciation, which allows businesses to deduct the declining value of these assets from their taxes. 

Note

There are some tangible assets that are not considered depreciable by the IRS such as land.

Amortization, meanwhile, is the process of spreading out the cost of an intangible asset (a patent, copyright, etc.) over a period of time. 

How Value Is Determined

It’s usually fairly easy to value a tangible asset: it’s worth whatever the market will bear. For example, a new car in a showroom is worth an agreed-upon amount, and its value depreciates by a set amount from year to year. Of course, some values fluctuate over time: the value of a barrel of oil, for instance, changes constantly, as do the values of stocks—but those values can be researched and verified.

Some intangible assets can also be easier to value by asking:

• What would a buyer pay to own or use the intangible asset?
• What is the useful life of this asset?

For example, a pharmaceutical company can make a good estimate as to the market value of the patent for a new drug based on projected sales of the drug. In addition, because patents are time-limited, it’s relatively easy to amortize their value. A 10-year drug patent will be worth less if five of the 10 years have already passed.

There are, however, intangible assets that are more difficult to value such as goodwill or branding, which are essentially subjective. For example, it’s possible to value the Coca-Cola brand simply on the basis of its secret recipe or how much money has been spent over time to design and promote the brand. But that doesn’t take into account the longevity of the brand, the goodwill of consumers, or other critical issues.

The Bottom Line

Both tangible and intangible assets have value, but tangible assets are generally physical items that can be easily turned into liquid assets while intangible assets are harder to value or sell. As a result, businesses make it a point to own both tangible and intangible assets. This is especially important if you’re thinking about taking out a loan or if you feel you might need access to cash.

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