What-is-Fictitious-Assets? With Examples
Fictitious assets are assets that do not have a tangible or physical existence but are recorded on the balance sheet as assets because they have future economic benefits or represent deferred expenses that will benefit the company over time. Here are some examples of fictitious assets:
Preliminary Expenses:
Definition:
Costs incurred before the incorporation of a company, such as legal fees, registration costs, and promotional expenses.
Treatment:
These expenses are amortized (spread out) over a period of time or until they are fully written off against profits.
Discount on Issue of Shares:
Definition:
The amount by which the issue price of shares is less than their nominal value.
Treatment:
This amount is shown as a deduction from the share capital account and is amortized over a period of time.
Losses on Issue of Debentures:
Definition:
The amount by which the issue price of debentures is less than their nominal or face value.
Treatment:
Similar to discount on issue of shares, it is shown as a debit balance in the profit and loss account and is amortized over the debentures' tenure.
Underwriting Commission:
Definition:
Commission paid to underwriters for underwriting the issue of shares or debentures.
Treatment:
Shown as a deferred expense and amortized over the period of the issue.
Development Costs:
Definition:
Costs incurred in developing new projects, products, or processes.
Treatment:
These costs are capitalized as an intangible asset and amortized over the expected useful life of the development.
Preliminary and Preoperative Expenses:
Definition:
Expenses incurred before the commencement of business operations, such as market research, feasibility studies, and trial runs.
Treatment:
Capitalized as intangible assets and amortized over their expected future benefits or period.
Intangible Assets in Research and Development:
Definition:
Costs incurred in research and development activities, such as patents, trademarks, and copyrights.
Treatment:
These costs are capitalized and amortized over their useful life.
Fictitious assets are recorded on the balance sheet to reflect expenses or deferred charges that have future economic benefits for the company. They are not physical assets like machinery or inventory but represent future expenses or costs that provide value to the business over time. Proper accounting treatment involves periodic amortization or write-off against profits to accurately reflect their economic impact on the company's financial position.