Fictitious assets can be defined as fake assets, which are normally used to record assets that do not have physical substance. They do not have a physical presence, and hence, these assets are not really assets in the true sense. Still, they are defined as assets mainly categorized as huge expenses or losses that occur within the company over time and tend to be unclaimed in the year in which they occur.
The main reason these expense heads are treated as assets and then expensed across several different years is that this is considered a major expense for the business. Hence, they are then spread across several years instead of being treated as such during the course of one year only. Therefore, they are categorized as assets using journal entries that convert expenses with a considerable value into assets.
Therefore, it can be seen that fictitious assets are intangible assets with no physical existence. They are expenses that are treated as assets. Since they are not purchased by the company (to keep them as assets), they have no realizable value.
They are continually amortized over time, across a span of more than one financial year. The main reason for this particular categorization is that these expenses, like assets, are expected to give returns over more than one year.
However, since it is a considerable amount of money, recording them in one year altogether might have an adverse repercussion. Therefore, they are categorized as assets first and then continually amortized over time. The company is making profits, and the company is certainly generating a positive return.
Fictitious assets may or may not exist on the balance sheet of a particular company. However, the following illustration shows how fictitious assets work and in what circumstances do companies treat expenses at fictitious assets.
Newton Co. got incorporated on 1st January 2020. Upon incorporation, they paid $60,000 as incorporation charges. However, during the first year of operations, they were not able to make a substantial profit.
They also incurred marketing promotional expenses of $40,000, in addition to a discount at which they issued shared. The total discount amount was $55,000. End of the year, Newton Co. decided to categorize all three expenses as fictitious assets. They are expected to earn profits from the next year, so they decided to amortize these fixed assets as soon as they can generate profits.
Difference between Fictitious Assets and Fixed Assets
The main difference between fictitious assets and fixed assets is that fixed assets are mostly tangible in nature (except for goodwill). They normally have a realizable value, and they are subsequently expected to generate returns over the useful life of the assets. In the same manner, fictitious assets have no realizable value.
They are only placed on the balance sheet as per the amount that has already been paid. It cannot be depreciated or sold once it is paid for. It carries forward from one year to the next unless the amount is fully amortized over time.
Similarly, it can also be seen that fictitious assets do not drive a tangible value. Estimating the amount of value addition as a result of this particular transaction is questionable. However, in the case of fixed assets, the returns that are expected to be generated can be estimated and calculated well in advance.
List of Fictitious Assets
There are numerous different examples of fictitious assets. Some of the examples of fictitious assets are as follows:
- Promotional Marketing Expenditures: Professional and promotional marketing is considered to be a significant investment for the company. For organizations that have considerable marketing budgets (mainly in the case of ATL Marketing), the benefits of such marketing campaigns are rendered over a period of more than one year. Therefore, they are categorized as fictitious assets, and then amortized over the period with which it is expected to return considerable value.
- Preliminary Expenditures: Preliminary expenditures are expenses that occur in the initial stages of the business. This might include costs associated with incorporation, legal and licensing fees, as well as other expenses that are associated to bring the business in a running condition. These expenses are considered significant in nature, and therefore, they are often treated as fictitious assets, and then amortized over the forthcoming years.
- Discount allowed on the issue of shares: In the case where the company issues shares at a discount, the discount amount is not considered as an expense (or a loss). Instead, it is considered to be a fictitious asset, and then it is expensed over the course of the year.