Fictitious assets meaning/definition
Fictitious assets are not an asset in reality. However, these assets are recorded in the balance sheet to reflect a true sense of the incurred cost that cannot be classified in a single accounting period. These are the expenses/losses that remain unclaimed in the period of occurrence. However, these are charged in the income statement in more than one accounting period of the business.
If an asset has the following three characteristics, it can be classified as a fictitious asset,
- No physical existence.
- Not realizable in the market / these assets cannot be sold
- Amortized over more than one profitable accounting period
It’s important to note that these assets are different from ghost assets and recorded to reflect a true sense of accounting. For instance, preliminary expenses are the types of fictitious assets and recorded in the business’s balance sheet. The reason for recording preliminary expenses in balance is that these expenses will benefit the business in the coming time as well. Hence, it’s not fair to record these expenses in the period of occurrence rather amortized over more than one accounting period.
So, these assets are not real assets with economic value, but assets recorded to satisfy the accounting needs.
Fictitious assets examples
Following are some of the examples of fictitious assets,
- Preliminary expenses paid by the business (For instance, expenses paid for the incorporation of the business).
- Discount allowed to the subscribers on the issuance of the shares.
- Promotional marketing expenses (material in value)
- Loss incurred on the issuance of the debentures
- Commission paid for the underwriting of the shares.
In reality, these are expenses and not assets. However, to reflect a true sense of accounting regarding expenses and benefits obtained, we accept these losses/expenses as fictitious assets.
Please note overstatement of the assets is something else than fictitious assets. An overstatement of assets is when management wants to overstate the proportion of the assets in the balance sheet. It’s usually done to window-dress the performance of the company. Hence, it’s a fraud.
Fictitious assets vs. intangible assets
Fictitious assets are not real assets, and however, intangible assets are real assets with an expectation to generate economic benefits in the future. It’s also important to note that all fictitious assets are intangibles, but not all intangible assets are fictitious assets.
The main difference between fictitious assets and intangible assets is that fictitious assets are not realizable and not expected to generate economic benefits. On the other hand, the intangibles assets are realizable and expected to generate economic benefits in the future.
Conclusion
Fictitious assets are recorded in the business’s balance sheet to reflect a true sense of accounting for the significant expenses incurred in an accounting period. These assets are intangibles and not realizable. Examples of these assets include promotional and incorporation expenses paid at the start of the business.
There is a difference between intangible and fictitious assets. Intangible assets comply with the definition of the assets, while fictitious assets are recorded in the balance sheet to reflect true accounting sense.
Also read, Elements of financial statement
