Fictitious Assets
Fictitious assets are a type of deferred revenue expenditure that provides a long-term benefit to the company, rather than being fully written off in the accounting period.
They are expenses or losses that are spread over multiple years instead of being accounted for in a single year. As such, they can help to reduce the amount of taxes a company pays in the current accounting period, while also providing them with an asset that will continue to be beneficial to their bottom line in the future.
The accounting treatment of fictitious assets can be complex, as they are not always considered to be an asset in the traditional sense. For example, they are not usually considered to be a part of the company’s balance sheet, and they cannot be used to purchase other assets or to pay off liabilities. In addition, they can often be difficult to value accurately, as they are not tangible items that can be easily measured or assessed.
Fictitious assets can be a useful tool for businesses that are looking to minimize their current tax liabilities, while also benefiting from longer-term advantages. However, it is important that businesses understand the accounting rules that apply to these assets, as well as the potential risks that may be associated with their use.
It is also advisable for businesses to obtain professional advice when dealing with fictitious assets, to ensure that they are handled in the most efficient and cost-effective way.
Characteristics of Fictitious Assets
Unrecognizable by the physical senses, fictitious assets are assets with no tangible existence in reality. They are recorded in a company’s books and are categorized as assets, but may be written off in the future. Fictitious assets include only those with deferred revenue nature, such as amortization expenses incurred while running a business.
Characteristics of fictitious assets include:
- No resale value in the market
- Intangible assets
- Deferred revenue nature
- Amortization over multiple profitable accounting periods
Though these assets are not tangible and have no real existence, they may still be valuable for a company. Fictitious assets can provide a way to reduce taxation and manage financial statements in an optimal way. They can also help a company to increase their profits over a period of time.
Thus, it is important for companies to understand the characteristics of fictitious assets and how to properly manage them.
Examples of Fictitious Assets
Examples of fictitious assets include expenses incurred during company formation, underwriting commissions, marketing expenditures, net losses, discounts on issue of shares, and losses on issue of debentures. Fictitious assets are generally non-cash items that are included in the balance sheet of a company and are not tangible assets. They are created to record expenses, losses, or liabilities that have been incurred but not yet been paid.
Most fictitious assets are recorded as a debit on the balance sheet and are usually associated with a corresponding credit.
Expenses incurred during company formation, referred to as preliminary expenses, are a good example of a fictitious asset. These expenses are incurred prior to the company’s incorporation and include legal and accounting service fees, filing fees, and other miscellaneous costs.
Underwriting commissions, which are payments received for underwriting a public offering or placing an issue in the market, are also a type of fictitious asset.
Similarly, marketing expenditures, net losses, discounts on issue of shares, and losses on issue of debentures are also examples of fictitious assets. Marketing expenditures are expenses incurred on marketing campaigns, amortized over time. Net losses are the debit balance of the Profit/Loss account and are considered a fictitious asset in some cases. Discounts on issue of shares occur when shares are issued at a price lower than their face value, and a loss on issue of debentures occurs as a capital loss when a debenture is issued at a discount.
All of these are examples of fictitious assets.
Accounting Treatment
Accounting treatment of fictitious assets typically involves amortizing the expense over a period of time, as evidenced by the Virat Kohli example. In this instance, the company charged only 25 Lakh to the Profit & Loss Account in the first year, and the remaining 75 Lakh was recorded as a fictitious asset on the balance sheet.
In the second year, another 25 Lakh was charged to the Profit & Loss Account, which reduced the balance of the fictitious asset on the balance sheet to 50 Lakh. This amortization of the fictitious asset over a period of time is a common accounting treatment of such assets.
The amortization of the fictitious asset in the Virat Kohli example is an effective way of spreading the expense over a period of time, reducing the immediate financial impact on the company. This allows the company to benefit from the expense over a longer period of time, rather than taking the full financial impact in the first year.
The amortization of fictitious assets is a common accounting treatment, as evidenced by the Virat Kohli example. This allows the company to spread the expense over a period of time, reducing the immediate financial impact and allowing the company to benefit from the expense for a longer period.
Conclusion
Fictitious assets are assets of a company which have no real monetary value or which do not exist in a physical form.
They are often created when a company records a transaction for which it has not received cash.
The accounting treatment of fictitious assets is dependent on the particular type of asset and the intention of the company when recording it.
Fictitious assets can provide benefits to a company such as increased liquidity or increased borrowing capacity.
However, they can also create significant financial problems if not properly recorded and managed.
It is important for companies to understand the implications of recording fictitious assets and to ensure that they are accurately recorded and managed.
Ultimately, it is important for companies to have a clear understanding of the accounting treatment of fictitious assets so that they can properly manage their financial resources.