What are Fictitious Assets? Meaning, Features and Treatment

Fictitious Assets: In accounting, not every item recorded in the balance sheet represents something that can be touched or sold. Some items exist only because of accounting principles, even though they do not hold any physical or realizable value. These are called fictitious assets. They often confuse students and beginners because, despite being termed “assets,” they are not real assets in the conventional sense.

Fictitious assets are important to understand because they affect how a company’s financial position is presented. They represent deferred expenses or losses that are spread over several years instead of being charged in a single accounting period.

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What are Fictitious Assets?

Fictitious assets are expenses or losses that have no tangible existence and no resale value but are still shown on the assets side of the balance sheet. They arise because certain expenditures are considered to provide benefits over a period of time, and therefore, instead of writing them off immediately, they are amortized gradually.

In simple words, fictitious assets are deferred revenue expenditures. They don’t generate income directly but are carried forward in the books with the expectation that they will benefit the business in the future.

Features of Fictitious Assets

Fictitious assets have certain key features that make them different from other assets. Below, we’ve mentioned some of these features:

• No physical existence: They do not have any tangible form, like land or machinery.

• Recorded as assets in the balance sheet: Even though they are expenses, they are shown on the asset side.

• No resale value: They cannot be sold or transferred to earn money.

• Amortized over years: Their value is reduced gradually over future years.

• Linked to business operations: They come from expenses required to run or start a business.

Examples of Fictitious Assets

Below, we’ve mentioned some common examples:

Preliminary Expenses: Costs incurred at the time of forming a company, such as legal fees, incorporation charges, and licensing expenses. These are written off over a few years instead of being expensed immediately.

Promotional Expenses: Heavy advertising or promotional campaigns are carried out when launching a product or brand. Treated as fictitious assets because they are expected to benefit the business in the long run.

Discount on Issue of Shares: When shares are issued at a price lower than their face value, the discount given is treated as a fictitious asset and written off gradually.

Loss on Issue of Debentures: Any loss incurred when debentures are issued below par or with high costs is shown as a fictitious asset and amortized over the debenture period.

Difference Between Fictitious Assets and Intangible Assets

Fictitious assets and intangible assets may sound similar, but they are different in many ways. Below, we’ve mentioned the difference between fictitious assets and intangible assets:

Treatment of Fictitious Assets in Accounts

Fictitious assets are shown on the assets side of the balance sheet, usually under the head “Miscellaneous Expenditure” or similar. Their value decreases each year as a portion is written off against profits. The process of gradually reducing their value is called amortization.

Example: If preliminary expenses are ₹1,00,000 and the company decides to write off ₹20,000 every year, the balance sheet will show:

• Year 1: ₹80,000

• Year 2: ₹60,000

• and so on until it becomes zero.

Importance of Fictitious Assets in Business Accounting

Fictitious assets play an important role in accounting. Some points that show their importance are:

• Helps in spreading expenses: Big expenses are not charged in one year but spread over several years.

• Balances financial statements: They help maintain a proper balance between income and expenditure.

• Supports business growth: By deferring expenses, companies can use available funds for growth.

• Shows transparency: It clearly records expenses that will be written off in the future.

Common Misunderstandings about Fictitious Assets

Many people confuse fictitious assets with other types of assets. Some common misunderstandings are:

Not fake assets: The word “fictitious” often confuses learners into thinking these are unreal or fraudulent. They are legitimate accounting items.

Not the same as intangible assets: Intangible assets generate future revenue and have resale value, while fictitious assets do not.

Not permanent: They reduce over time until their value becomes zero.

Fictitious assets are deferred revenue expenditures that exist only in accounting records and not in reality. They have no physical form or resale value but are carried forward in the balance sheet to be written off gradually. Examples include preliminary expenses, promotional costs, and discounts on the issue of shares.

By understanding fictitious assets, students and professionals can clearly distinguish them from intangible assets and recognize their role in presenting a company’s financial statements more accurately.