Fictitious Assets: Characteristics and Examples

Fictitious assets have no realizable value yet they are represented in the assets column of a financial statement. These assets do not have any lifespan. Every company indicates these assets as cash expenditure in their book of accounts.

In this article on fictitious assets, we will discuss the details of these assets along with their examples and representation on the balance sheet.

Table of Contents

• Fictitious asset meaning
• Representation on the balance sheet
• Characteristics
• Examples

What are fictitious assets?

Fictitious assets are the type of assets that have no physical existence. This means that such assets do not have any realizable value. However, they are reported as actual cash expenditures in financial statements. These are expenses and losses that are not offset in the profit and loss account. This means that these remain unclaimed during the period of their occurrence. 

Such assets are to be written off in profit and loss account by reducing the value in the balance sheet. They are spread across an accounting period of one or more years. As the word ‘fictitious’ means fake, these are not actually the assets of a company even though they are represented in the assets of the balance sheet. 

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Representation on Balance Sheet

As shown in the above-given image, these are recorded in the assets section of the balance sheet. These are not considered to be expenditures in the current accounting period. These assets are represented on the balance sheet. Here, goodwill is not considered a fictitious asset. 

This is done since the organization finds the probability of receiving returns from these expenses over time similar to assets. Since these are intangible assets, there is no possibility of depreciation. Due to this, they are amortized with time.

Characteristics of Fictitious Assets

The following are the characteristics of fictitious assets:

1. Indicates the miscellaneous expenditure that is recorded in books.
2. These are intangible assets which means they have no existence in reality.
3. They are categorized as assets only to be written off in the future.
4. Not realizable in the market, due to which they have no resale value.
5. They include only those assets that have the nature of deferred revenue expenditures.
6. These are the expenses incurred while running a business. 
7. Amortized for over more than a single profitable accounting period.

Example of Fictitious Asset

Let us now discuss the different example of fictitious assets:

1. Preliminary expenses: These are the incorporation expenses incurred during the formation of the enterprises. These include the cost of drafting MOA and AOA, the company’s registration fees, printing the statutory books of the company, and other expenses related to the building of the company’s corporate structure. 
2. Underwriting commission: It refers to the payment that firms receive as compensation for underwriting a public offering or placing an issue in the market instruments. 
3. Marketing expenditure: These are the expenses incurred by the company on marketing campaigns expecting returns in more than one year. These expenses are amortized systematically over the years so that their value is reduced periodically. 
4. Net Loss of the company: In certain cases, debit balance of the P/L account is considered a fictitious asset.
5. Discount on the issue of shares: Whenever a company issues its shares at a price that is lower than its face value, the discount occurs. Let us consider that the company issued a share having 30 rupees which had a face value of 35 rupees. In this case, the company is offering a 5 rupee of discount. When a company issues multiple shares at a discount, it will have to bear a ‘5n’ discount (where n is the number of shares). This loss is considered a miscellaneous expenditure.  
6. Loss on Issue of Debenture: This is also known as a capital loss. It happens when a premium that is payable on redemption of debenture is issued at a discount. Do note that such loss is reduced with time. 

Fictitious Assets Vs Intangible Assets

Both intangible and fictitious assets do not have physical existence. However, these two differ on the basis of certain parameters. In the following table, we will discuss the difference between intangible and fictitious assets:

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Conclusion

Hope that through this article, you have been able to understand fictitious assets in detail. These assets have no physical form, yet they are included in the balance sheet. To understand their benefits, it is important to avail of more than one accounting period.