- What is a tangible fixed asset?
- Tangible vs. Intangible Fixed Assets: Key Differences
In your business, acquiring an office building, industrial machinery, or a transport vehicle requires recording the transaction in your company’s accounts. These are recorded as tangible fixed assets in accounting records. You might ask what a tangible asset is.
Key Takeaways
- A tangible fixed asset must be a physical item used beyond the current fiscal year for production, supply, rental, or internal management.
- Common examples include buildings, machinery, vehicles, land, and industrial equipment, all recorded on the balance sheet.
- Each tangible asset must be depreciated over its useful life, with the depreciation method and duration depending on the asset type.
Is there a list of tangible assets? How do tangible and intangible assets differ? How do you account for a tangible asset?
We provide answers to these questions.
What is a tangible fixed asset?
A tangible fixed asset is a physical asset. Its purpose is to aid in the production or supply of goods or services. It can also be rented to third parties or used for internal management purposes.
The entity expects it to be used beyond the current financial year.
Let’s look at this definition of tangible fixed assets in more detail.
To understand tangible fixed assets, one must first grasp what a fixed asset is. A fixed asset is an item among your company’s assets that has a positive value. Therefore, it is an asset, unlike a bank loan, which constitutes a liability on the company’s balance sheet.
When this asset is intended to be used by your company on a long-term basis, i.e. for a period exceeding one accounting year (12 months), we speak of fixed assets. It is then an element which is the part of fixed assets. Conversely, assets which are intended to be used occasionally are part of current assets.
Regarding tangible fixed assets, they are characterized by the fact that they are physical assets used in the context of the company’s activity.
Examples:
If you’re wondering what the most common tangible assets are, there’s no such thing as a tangible asset inventory.
However, the general accounting plan establishes a list of tangible fixed assets in class 21 accounts.
Examples of tangible fixed assets include the following:
- the land;
- the fittings and arrangements;
- the buildings;
- technical installations;
- industrial materials and tools;
- transport equipment;
- office and computer equipment;
- the furniture.
For example, a transport van, a computer or an office chair are tangible fixed assets.
Tangible vs. Intangible Fixed Assets: Key Differences
There are three categories of fixed assets:
- tangible fixed assets,
- intangible assets,
- financial fixed assets.
It is important to differentiate between tangible and intangible assets.
Indeed, an intangible asset is a “non-monetary asset without physical substance” according to the general accounting plan. Therefore, an intangible asset lacks physical characteristics.
It cannot be “touched.”
This type of fixed asset is therefore distinguished from tangible fixed assets, which are physical assets held permanently by a company.
The difference between tangible and intangible fixed assets is therefore made via this “physical character”.
On the other hand, assets like goodwill, software, and patents are intangible. The same applies to a brand and a customer database.
What depreciation for tangible fixed assets in accounting?
In accounting, tangible fixed assets require consideration due to depreciation. These assets are expected to stay as part of a company’s assets for multiple years. Over time, they undergo wear and tear, which reduces their value.
This reduction in value from use is recorded by depreciating the asset’s cost.
Thus, the company has the possibility of spreading the acquisition price over time, i.e. over different accounting periods, depending on its theoretical operating life.
For example :
Bodily depreciation
Depreciation period
Depreciation rate
Computer hardware
3 years
33%
Office furniture
5 to 10 years
10 to 20%
Means of transport
4 to 5 years
20 to 25%
Industrial machinery and large tools
5 to 10 years
10 to 20%
Facilities and installations
10 to 20 years old
5 to 10%
Building
20 to 50 years old
2 to 4%
Not all tangible fixed assets qualify for depreciation. To be eligible, tangible fixed assets must have a minimum value of $2500 excluding tax. Land is not depreciable.
How to account for a tangible fixed asset?
To understand how to take a tangible fixed asset into account in accounting, it is necessary to check that the asset meets the required conditions, and to value the asset before being able to carry out the accounting treatment.
The conditions for recording a tangible fixed asset
In order to ensure that the asset in question falls into the category of tangible fixed assets, it is necessary to check that:
- the property meets the definition of an asset, that is, an item that has a positive economic value for the company;
- the good provides future economic benefits to society;
- the property will benefit the company in the long term, i.e. for a period of more than 1 year.
Valuation of tangible fixed assets
In order to be able to include tangible fixed assets in the company’s balance sheet, it is necessary to be able to determine their value.
Depending on the time of valuation of the tangible fixed asset, different valuation methods can be used:
Time of valuation of tangible fixed assets
Method of valuing tangible fixed assets
Entry into the company’s assets
Acquisition cost for goods acquired for considerationMarket value for goods acquired free of chargeCost of production for goods produced internally
Inventory or closing of accounts
Amortized historical cost less depreciation
Exit from the company’s assets
Net book value
Therefore, a tangible fixed asset is recorded on the balance sheet at its acquisition cost, which includes the purchase price along with related expenses such as transportation and installation.
Accounting treatment of tangible fixed assets
The accounting treatment of tangible fixed assets involves the recording of several accounting entries.
Thus, if the tangible fixed asset is used internally by the company, it is appropriate to:
- debit account “23 – Fixed assets in progress”;
- credit account “722 – Tangible fixed assets production”.
FAQs
What are the 3 types of fixed assets?
There are three types of fixed assets in accounting:
- tangible fixed assets;
- intangible assets;
- financial fixed assets.
What are tangible fixed assets?
Tangible fixed assets are physical assets. They serve the company’s economic interests for over a year. Examples include:
- land;
- fittings and layouts;
- constructions;
- technical installations, industrial equipment and tools;
- transport equipment;
- office and computer equipment;
- the furniture.
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Frequently Asked Questions
What qualifies as a tangible fixed asset?
A tangible fixed asset is a physical item owned by a business that is used in operations for more than one year and is not intended for resale. Common examples include buildings, machinery, vehicles, furniture, and computer equipment.
How are tangible fixed assets different from intangible fixed assets?
Tangible fixed assets have a physical form that you can see and touch, such as land or equipment, while intangible fixed assets lack physical substance, such as patents, trademarks, and goodwill. Both types are recorded on the balance sheet but are depreciated or amortized differently.
How is depreciation applied to tangible fixed assets?
Depreciation is applied to tangible fixed assets by spreading the cost of the asset over its estimated useful life. The most common methods are straight-line depreciation, which allocates equal amounts each year, and declining balance depreciation, which front-loads the expense in earlier years.