If you’re a small business owner, you might have heard of “intangible assets” but may not fully understand what it means.  

Intangible assets refer to non-physical assets that have value to a business, such as intellectual property (patents, trademarks, copyrights), brand recognition, customer lists, and proprietary software. Unlike tangible assets, which can be seen and touched, intangible assets are often intangible and difficult to quantify.  

Intangible assets can be critical to a company’s success, providing a competitive advantage and generating revenue. However, they can also be easily overlooked and undervalued, leading to potential missed opportunities.  

In this blog, we’ll delve deeper into intangible assets and why they are essential for small businesses. We’ll also discuss how to identify, value, and protect intangible assets and provide tips for small business owners to leverage their intangible assets for growth and success.  

Purpose of Intangible Assets in Businesses

Intangible assets lack physical substance but have value to a business. They are an important component of a company’s overall value and can be used for various purposes, including:  

Brand Recognition

Intangible assets such as trademarks, patents, and copyrights protect a company’s brand, products, and services. These assets help to establish brand recognition, which is critical to a company’s success.  

Competitive Advantage

Intangible assets can give a company a competitive advantage. For example, proprietary technology or unique business processes can give a company an edge.  

Revenue Generation

Some intangible assets, such as intellectual property, can be licensed or sold for a profit. This can provide a significant source of revenue for a company.  

Financing

Intangible assets can be used as collateral for loans or as a basis for financing. Lenders may be more willing to provide financing if a company has valuable intangible assets that can be used as collateral.  

Mergers and Acquisitions

Intangible assets can be a significant factor in mergers and acquisitions. A company with valuable intangible assets may attract potential buyers or merger partners more.  

Overall, intangible assets are essential to a company’s success and can provide significant value in various ways.  

Tangible Assets vs Intangible Assets  

Tangible assets are physical assets that have a physical form and can be touched or seen, such as buildings, machinery, equipment, vehicles, inventory, and land. These assets can be fixed or current and have a monetary value that can be depreciated over time.  

On the other hand, intangible assets are assets that do not have a physical form, and their value is based on the rights or privileges they provide. Examples of intangible assets are; patents, trademarks, copyrights, goodwill, brand recognition, and customer lists.  

The main dissimilarity between tangible and intangible assets is that tangible assets are physical and can be touched or seen. In contrast, intangible assets are non-physical and cannot be touched or seen. Tangible assets are typically depreciated over their useful lives, while intangible assets are usually amortized.  

Following are the examples of tangible and intangible assets:   

Tangible assets in accounting

– A company’s manufacturing equipment  

– A fleet of delivery trucks  

– A warehouse or distribution center  

– Land and buildings  

– Raw materials and inventory  

Intangible assets in accounting

– A company’s trademark or brand name  

– Patents for a new product or invention  

– Copyrights on a book or movie  

– A company’s customer lists or database  

– Goodwill represents the value of a company’s reputation and relationships with customers and suppliers.  

Step-by-step Explanation in intangible Assets with Example

Intangible assets are non-physical assets that do not have a physical presence but provide long-term economic benefits to a company. Examples include patents, trademarks, copyrights, brand names, goodwill, and customer lists.  

To calculate intangible assets in accounting, you can use the following formula:  

Intangible assets = Acquisition cost – Accumulated amortization – Impairment losses

Here is a step-by-step explanation of each component of the formula with an example:  

1. Acquisition cost

It is the amount of money that a company pays to acquire an intangible asset. For example, let’s say that a company paid $50,000 to acquire a patent. 

2. Accumulated amortization

Intangible assets are typically amortized over their useful life. This means that their cost is spread out over several years. To calculate the accumulated amortization, you need to know the intangible asset’s useful life and the amortization method. For example, let’s say that the patent’s useful life is ten years, and the company is using the straight-line amortization method. In this case, the accumulated amortization for the first year would be:  

Accumulated amortization = (Acquisition cost / Useful life) x Number of years used Accumulated amortization = ($50,000 / 10) x 1 Accumulated amortization = $5,000

3. Impairment losses

If the value of intangible assets declines, the company may need to record an impairment loss. For example, if the patent becomes obsolete, the company may need to write down the value of the patent.  

Once you have calculated each of these components, you can use the formula to calculate the value of the intangible asset:  

Intangible assets = $50,000 – $5,000 – $0 Intangible assets = $45,000  

In this example, the value of the intangible asset is $45,000.  

Types of Intangible Assets in Accounting

Intangible assets are non-physical assets but are valuable to a business. There are several types of intangible assets, including:  

– Brand equity: The value of a brand’s reputation, recognition, and consumer loyalty.  

– Patents: Exclusive rights granted to an inventor for a certain period to prevent others from using or selling their invention.  

– Copyrights: Exclusive rights granted to authors, artists, and other creators for their original works.  

– Trademarks: Symbols, logos, or words that distinguish a company’s products or services from its competitors.  

– Goodwill: The intangible value of a company’s reputation, customer relationships, and other factors contributing to its success.  

These intangible assets can be valuable to a business and contribute significantly to its overall value. 

In a Nutshell  

In conclusion, intangible assets are a crucial component of modern business accounting. Although they lack physical substance, they can significantly impact a company’s financial success. It is essential for companies to properly identify, measure, and report their intangible assets to ensure accurate financial reporting and valuation. By doing so, companies can effectively manage and leverage their intangible assets to enhance their competitive advantage and overall performance. Examples of intangible assets include trademarks, patents, copyrights, and customer relationships. Understanding the concept of intangible assets is vital for businesses and investors to make sensible decisions and achieve long-term success.

Also Read: A Guide To Unlock The Secrets Of Liabilities In Accounting

Farwah Jafri

Farwah Jafri is a financial management expert and Product Owner at Monily, where she leads financial services for small and medium businesses. With over a decade of experience, including a directorial role at Arthur Lawrence UK Ltd., she specializes in bookkeeping, payroll, and financial analytics. Farwah holds an MBA from Alliance Manchester Business School and a BS in Computer Software Engineering. Based in Houston, Texas, she is dedicated to helping businesses better their financial operations.