Which classification should be used for software owned by a company?

Software owned by a company is classified as an intangible asset because it does not have a physical form, yet it still holds significant value for the business. Intangible assets include things like patents, trademarks, copyrights, and software, which contribute to a company's operations and earnings but cannot be touched or physically handled.

The value of software comes from its ability to provide functionality and support various business processes rather than from any physical characteristics. This classification helps in accurately representing the company's financial statements, as intangible assets are recognized differently than tangible assets. For instance, software may be amortized over its useful life rather than depreciated like physical assets, which reflects its consumption over time.

This proper classification is crucial for financial reporting and asset management, aligning with accounting principles such as Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS).

While inventory includes items that are held for sale in the ordinary course of business, fixed assets are tangible items like machinery or vehicles, and real property pertains to land and buildings. These classifications do not fit software's nature and purpose within a company, reinforcing why the intangible classification is appropriate.