What is a Tangible Asset?
A tangible asset is an item of value that a business or individual owns and can touch, see or feel such as land, buildings, machinery, vehicles, or stock. The cost of a tangible asset can be depreciated over time.
There are two types of assets: current assets and long-term assets. Current assets are cash and assets that will be converted into cash within one year. Long-term assets are assets that will be held for more than one year.
Tangible assets are important because they can be used as collateral for loans. They also give the owner legal rights and can appreciate in value over time. However, tangible assets can also depreciate in value and may require maintenance costs.
Types of Tangible Assets
Examples of common types of tangible assets include:
Businesses use depreciation to write off the cost of these assets against their taxable profits over a number of years.
The way in which depreciation is calculated will depend on the type of asset concerned.
For example, land does not depreciate but buildings, machinery and vehicles do.
This is because land typically keeps its value or increases over time while buildings, machinery and vehicles reduces in value as they age and become outdated.
The rate at which an asset depreciates will also depend on its type – for example, kitchen equipment will have a different rate to office furniture.
Assets can be either fully written off against profits in the year they are bought or depreciated over a number of years.
The method used will depend on the size and scale of the business as well as the country in which it operates.
For businesses operating in the UK, the two main methods used to calculate depreciation are the declining balance method and the straight line method. The former offers larger tax breaks in the early years after an asset is bought but less generous ones later on, while the latter offers smaller tax breaks each year but for a longer period of time. Both have their advantages and disadvantages so businesses need to carefully consider which one would work best for them before making a decision.