A intangible asset is one whose value depends on particular physical properties such as buildings, land, or machinery. Tangible assets, by contrast, represent legal claims to some future benefit.

Material possessions are also easy to identify because they tend to have a limited value and life expectancy. Intangible assets are recorded on the balance sheet initially, but as they are used upwards, they are carried in the income statement.

Inventory, for example, is an intangible asset when used, included in the cost of assets sold to a company. Cost of goods sold represents costs that are directly related to good production. As inventory is used upwards in the production process, it is recorded in the cost of goods sold.

Fixed assets, such as plants and machinery, are other types of tangible assets recorded in the balance but as their useful life decreases, that portion is used in the statement of financial performance through a process called depreciation. Depreciation is the process of allocating part of the cost of assets over the years as it is used to make company money. Depreciation helps to show the deterioration of tangible assets as they are used during their lifetime. 3

Intangible assets can be a major challenge to produce in terms of accounting. Similar to fixed assets, intangible assets are initially recorded in the balance as long-term assets.

The cost of other intangible assets may be recalculated in the past years when the asset produces the value of the company or throughout its useful life. While depreciation is used for tangible assets, intangible assets use for cash flows. Depreciation is synonymous with depreciation, but is used only for intangibles. Depreciation spreads the cost of assets annually as stated in the income statement.