What is a Long Lived Asset? - Tangible & Intangible

Instructor: Deborah Schell

Deborah teaches college Accounting and has a master's degree in Educational Technology.

Businesses own many things that help them earn money from selling goods and services to customers. In this lesson, you will learn about tangible and intangible long-term assets.

What Is a Long-Lived Asset?

Let's meet Tia, who owns Tia's Terrific Treats. Tia just met with her accountant to review her first year of operations and she highlighted Tia's tangible and intangible long-lived assets on one of the financial statements. Tia isn't sure about the difference between these two types of assets. Let's see if we can help her with this problem.

Assets are things of value that a business owns such as cash, inventory, and land. Assets can be divided into two categories: current and long-lived. Current assets are items of value that the business will enjoy the benefit of within the next year such as inventory and cash. Long-lived assets (sometimes called non-current assets or long-term assets) are those assets that the business will use for longer than one year, and examples include Tia's buildings and equipment. Long-lived assets are not sold to customers but are used by the business to earn revenue or the money it gets from selling its products and services to its customers.

Long-lived assets can also be divided into two categories: tangible and intangible. Let's explore these assets in more detail.

Tangible Long-Lived Assets

If something is tangible, you can touch and feel it. Tangible long-lived assets are assets that have physical substance and represent those assets that the company will benefit from for longer than a year. Examples of long-lived tangible assets in Tia's business include computer equipment, furniture, machinery, buildings, and land.

The cost of a tangible long-lived asset is calculated as the cost that Tia paid to purchase the item as well as any cost that she incurred to get it ready for its intended use. Let's assume that Tia paid $120,000 to purchase a piece of equipment for her factory and paid $5,000 in installation costs. Tia would record a cost of $125,000 for her equipment on the financial statements.

Tangible long-lived assets lose value as they are used over time and this is known as depreciation. A company would record depreciation or the cost of using the asset every year in the same period as the revenue the asset helped the company to earn. This means that Tia would record depreciation for each of her tangible long-lived assets separately. The amount of depreciation recorded over the life of the asset is known as accumulated depreciation and this amount is deducted from the cost of the asset for presentation on the financial statements.

Intangible Long-Lived Assets

Intangible long-lived assets represent those assets that cannot be touched or felt, e.g., they lack physical substance. Examples of intangible long-lived assets in Tia's business could be patents, copyrights or trademarks. Tia's business could have patents or a government license indicating that she has a unique process to make her treats that only she can use or make money from for a specified period of time.

A company can develop long-lived intangible assets in-house or it can purchase them when acquiring another business. The costs related to Tia's patent could include the research and development costs incurred over time as the company was perfecting its unique treat-making process.

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