Learn About Fictitious Assets, Its Types With Examples
In accounting, the term “fictitious assets” refers to expenditures that do not represent physical items or tangible assets. Instead, these are costs incurred by a business, such as promotional expenses, preliminary business expenses, or share issue expenses, which are recorded as assets because their benefits are expected to extend over multiple accounting periods.
Although fictitious assets do not hold real intrinsic value or marketable worth, their treatment is crucial for maintaining accurate financial records. By properly accounting for these costs, companies can reflect a true and fair financial position. This page provides a detailed look at fictitious assets, their various examples, and their importance in ensuring clarity and consistency in financial statements.
What are Fictitious Assets?
Fictitious assets are expenses that a company records as assets because they are expected to benefit the business over time. They have no physical form or marketable value and typically arise from business activities like promotions, preliminary setup, or issuing shares. While they appear under the assets section in financial statements, these costs are gradually written off over multiple accounting periods rather than being expensed all at once.
Key Features of Fictitious Assets
No Tangible Form: They don’t exist physically and can’t be converted into cash.
Deferred Recognition: These expenses are not recognized in the same year they occur but are spread out over time.
No Resale Value: They cannot be sold or liquidated like physical assets.
Classified Under Intangibles: While part of intangible assets, they represent deferred costs rather than revenue-generating resources.
Common Examples of Fictitious Assets
Promotional Expenses: Marketing campaigns viewed as long-term investments that gradually deliver returns.
Preliminary Expenses: Initial costs of incorporating a business, such as legal fees and regulatory charges.
Discount on Share Issues: The reduction offered on shares, treated as a deferred expense and amortized over time.
Loss on Debenture Issues: Any financial shortfall from issuing debentures, classified as a fictitious asset and written off gradually.
Fictitious vs. Intangible Assets
Conclusion
Fictitious assets represent deferred costs that companies spread over several years. By understanding these items, businesses maintain accurate financial statements and ensure that expenses are reported in a systematic, transparent manner.
FAQs on What is Fictitious Assets: Everything You Need to Know
1. What are fictitious assets in accounting?
Fictitious assets are not real assets but are expenses or losses that a business has not yet written off. They are shown on the asset side of the balance sheet temporarily because their benefit is expected to be received over multiple accounting periods. These items have no physical form and no resale value.
2. What are some common examples of fictitious assets?
The most common examples of fictitious assets that students learn about in the CBSE/NCERT syllabus include:
- Preliminary Expenses: Costs incurred before the incorporation of a company, such as legal fees and registration charges.
- Discount or Loss on Issue of Shares/Debentures: The shortfall when shares or debentures are issued at a price below their face value.
- Deferred Revenue Expenditure: Heavy expenditure on advertising or research and development, the benefit of which will last for several years.
3. How are fictitious assets presented on a company's balance sheet?
Fictitious assets are shown on the asset side of the balance sheet, typically under the head 'Miscellaneous Expenditure' (to the extent not written off or adjusted). They remain on the balance sheet until they are gradually written off against the company's profits over their estimated benefit period.
4. Why are certain large expenses treated as fictitious assets instead of being fully expensed in one year?
This treatment is based on the matching principle of accounting. Since the benefits of large expenditures like a major advertising campaign or initial setup costs are realised over several years, it would be misleading to charge the entire cost against the profits of a single year. By deferring the expense, a company matches the cost to the periods that benefit from it, presenting a more accurate view of its profitability each year.
5. How do fictitious assets differ from intangible assets like goodwill or patents?
This is a crucial distinction. While both are non-physical, their nature is fundamentally different:
- Value: Intangible assets like goodwill and patents have a real, realisable value and can be sold. Fictitious assets have no realisable value; they are simply unamortized expenses.
- Purpose: Intangible assets help in generating revenue for the business. Fictitious assets do not generate revenue; they represent a cost whose benefit is spread over time.
6. Why are preliminary expenses considered a fictitious asset?
Preliminary expenses are the costs incurred to establish a company. These expenses provide a long-term benefit for the entire life of the company, not just the first year. Therefore, charging the full amount in the first year would unfairly reduce the reported profit. Instead, it is recorded as a fictitious asset and written off against profits over a few years, aligning the cost with the period of benefit.
7. Can a tangible fixed asset like land or machinery ever be classified as a fictitious asset?
No, a tangible fixed asset can never be a fictitious asset. Tangible assets have a physical existence and a definite market value. Fictitious assets, by definition, lack both physical form and any resale or realizable value. They are purely an accounting entry representing a deferred cost.
8. What is the accounting treatment for writing off fictitious assets?
The process of writing off a fictitious asset is called amortisation. Each year, a portion of the fictitious asset's value is charged to the Statement of Profit and Loss. The corresponding amount is then deducted from the fictitious asset account on the balance sheet, reducing its value over time until it becomes zero.
