Fictitious assets are not actual physical or financial assets but are expenses or losses incurred by a company that cannot be written off during the accounting period they arise. Instead, these expenditures are carried forward on the balance sheet and gradually amortized or written off over several years. Though listed as assets, fictitious assets do not represent any tangible or real asset that the company can utilize. They exist purely for accounting purposes, to spread out large, one-time expenses that would otherwise drastically reduce profits in a given financial year.
In this article, we will explore what fictitious assets are, their characteristics, examples, and how they differ from intangible assets.
What Are Fictitious Assets?
Fictitious assets are expenditures or losses that a company cannot charge to the profit and loss account in a single accounting year due to their large size. These expenses are therefore recorded on the asset side of the balance sheet and gradually written off over a period of time. These assets do not have any real physical presence or value and do not represent actual economic benefits to the company. However, they help to improve the financial position on paper by spreading the expense across several financial periods.
- Preliminary expenses: Costs incurred when setting up a company, such as legal fees, registration, and promotion expenses.
- Discount on issue of shares and debentures: The difference between the par value and the issue price when shares are sold at a discount.
- Underwriting commission: Fees paid to underwriters for selling shares or debentures.
- Deferred revenue expenses: Expenses that provide benefits over several years, such as heavy advertising expenditures or research and development costs.
These assets are fictitious because they do not have any tangible or realizable value but exist purely to align accounting practices with financial standards.
Characteristics of Fictitious Assets
Understanding the characteristics of fictitious assets is important for recognizing their role in financial statements. Fictitious assets are crucial for helping businesses manage their finances, especially when faced with large, one-time expenses that cannot be fully accounted for in a single fiscal year.
- Non-Tangible: Fictitious assets do not represent any physical or realizable value. They are not assets in the conventional sense, as they cannot be sold or used as collateral.
- Amortization Over Time: These assets are gradually written off over time, rather than immediately charged to expenses. This spreads the financial impact across multiple accounting periods, reducing the effect on profitability in any single year.
- Recorded on the Balance Sheet: Despite being expenses, fictitious assets are recorded on the asset side of the balance sheet to reflect the deferred write-off process.
- No Real Economic Benefit: Unlike real assets, fictitious assets do not directly contribute to the company’s profitability or operations. Their only function is to temporarily balance the accounts for accounting purposes.
Example of Fictitious Asset
An example of a fictitious asset can be understood by looking at how companies handle certain large expenditures. These examples illustrate how fictitious assets help companies manage large financial outlays over time, improving financial presentation in the short term.
Preliminary Expenses
When a company is formed, it incurs various expenses, such as legal fees, accounting fees, and costs associated with registration and promotion. These expenses are necessary to establish the company but do not generate immediate profits. Instead of charging these costs entirely to the first-year profit and loss account, the company records them as fictitious assets. These expenses are then gradually amortized over a few years.
Discount on Issue of Shares
When a company issues shares at a price lower than their nominal value, the difference is considered a discount on the issue of shares. This discount is not immediately recognized as a loss but is spread over several financial years as a fictitious asset.
Fictitious Assets vs. Intangible Assets
Though fictitious assets and intangible assets are both non-physical assets, there are distinct differences between the two. Intangible assets have an inherent value that contributes to the company’s profitability, whereas fictitious assets are merely deferred expenses with no direct economic impact.
| Aspect | Fictitious Assets | Intangible Assets |
| Nature | Expenses that are amortized over time | Non-physical assets that provide economic benefits |
| Examples | Preliminary expenses, discount on shares | Patents, trademarks, goodwill |
| Tangible Value | No realizable value; purely accounting entries | Represent future economic benefits for the company |
| Amortization | Gradually written off over time | Amortized or depreciated over their useful life |
| Economic Benefit | No direct benefit, used to balance accounts | Contributes directly to revenue generation and value |
Is Patent a Fictitious Asset?
No, patents are not fictitious assets. Patents fall under the category of **intangible assets**, as they provide legal rights and exclusive control over an invention or innovation. A patent grants the company the ability to protect its invention, which can generate revenue through sales, licensing, or royalties. Unlike fictitious assets, which are simply expenses deferred over time, patents have real economic value and contribute to the company’s profitability.
Patents are amortized over their legal life, similar to how tangible assets are depreciated, but they are distinct from fictitious assets because they represent future economic benefits.
Conclusion
Fictitious assets are deferred expenses that are recorded on the balance sheet and amortized over time. They differ from intangible assets because they do not offer direct economic benefits and exist only for accounting purposes. Common examples of fictitious assets include preliminary expenses and discounts on share issues. Businesses use fictitious assets to spread large, one-time costs over multiple periods, improving their financial presentation. However, these assets do not have any inherent value and are eventually written off the books.
Fictitious Assets FAQs
What are fictitious assets?
Fictitious assets are expenses that are recorded as assets and gradually written off over several accounting periods, such as preliminary expenses and discounts on shares.
Can fictitious assets be sold or realized?
No, fictitious assets have no tangible value and cannot be sold or used as collateral. They exist solely for accounting purposes.
Is goodwill a fictitious asset?
No, goodwill is an intangible asset, not a fictitious asset. Goodwill represents the value of a company’s brand and customer relationships.
What is the difference between fictitious assets and intangible assets?
Fictitious assets are deferred expenses without any real value, while intangible assets, such as patents and trademarks, provide future economic benefits to a company.
Why are fictitious assets recorded on the balance sheet?
Fictitious assets are recorded on the balance sheet to spread large expenses over multiple financial periods, improving the company’s short-term financial appearance.
