Day 134 Tangible and intangible assets in accounting

Tangible and intangible assets in accounting

The PPE stands for planet, property and equipment in accounting. It is also called the fixed asset, which held by the company in order to generate future cash inflows instead of sale it to customers. These non-current assets can either be tangible and intangible, but most of them need to account for the depreciation/amortization at the end of the accounting period.

The main reason for accountants to record the depreciation/ amortization expenses is the nature of the accrued accounting system, where all expenses should be recognized in which it occurs. Hence if we failed to allocate the expense gradually to the asset fair value, then we must record the cost of the asset on the purchase. Therefore, it will create a large amount of deficits followed by a consistent profit stream, which is considerably inaccurate. Because the decision maker should be able to realize the link between the revenue and cost of the asset. Thus the depreciation and amortization emphasize this link. Generally, there are two methods to calculate these expenses: straight-line method and unit of production method. The straight-line method will divide the cost of the asset less residual value by the estimate useful life. On the other hand, the unit of production method will find out the depletion value for each unit produced, and adjusts the expense amount due to the period production.

Besides the tangible assets, there are many types of intangible assets that also have a significant role on business’ profit generation. For instance, patent, franchise, goodwill, copyright and brand name are the typical intangible assets. Similar to the tangible assets, most of them are facing amortization every financial year. For example, the patent will last for only a few years, so we must allocate the cost of the research to its useful life. However, unidentifiable assets such as goodwill or brand name are not amortizable, since they cannot be separated from the entity. In order to act correspondingly to the accounting principle, these assets should be reevaluated at each financial year to assess the possible impairment.