Fictitious assets are not real or tangible assets that a company owns. Rather, they are intangible assets with no intrinsic value but have been created by the accounting process. These assets can include deferred expenses, prepaid expenses, and fictitious receivables. In other words, these assets do not exist in reality but are still accounted for as if they did.
The term “fictitious asset” is often used interchangeably with “deferred charges.” A deferred charge is an expense that has been paid in advance and will be recognized as an expense over time. For example, if a company pays $12,000 for rent for the next year in advance, it would be recorded as a deferred charge on the balance sheet until it is recognized as an expense each month.
Another example of a fictitious asset is a discount on the issue of shares. When a company issues shares at a price lower than their face value, the difference between the face value and the issue price is recorded as a fictitious asset on the company’s balance sheet. This asset is gradually written off over a period of time, usually through the issuance of bonus shares or through the transfer to a share premium account.
Accounting treatment of fictitious asset
Fictitious assets are recorded on a company’s balance sheet as assets, even though they have no physical existence. These assets are not tangible, but they represent future economic benefits for the company. However, since fictitious assets are not real assets, they need to be treated differently from tangible assets in terms of accounting treatment.
The accounting treatment of fictitious assets depends on the type of asset in question. Let us take a look at some of the most common types of fictitious assets and their accounting treatment:
Deferred revenue is recorded as a liability on the balance sheet until the goods or services are delivered to the customer. Once the goods or services are delivered, the liability is converted to revenue, and the deferred revenue is written off the balance sheet.
Discount on Issue of Shares
The discount on the issue of shares is recorded as a fictitious asset on the balance sheet. This asset is gradually written off over some time. The company can either issue bonus shares or transfer the amount to a share premium account to write off the discount.
Preliminary expenses are capitalized on the balance sheet as a fictitious asset. These expenses are written off over a period of time through the statement of profit and loss. The expenses are gradually transferred from the asset side of the balance sheet to the liability side.
Loss on Issue of Debentures
If a company issues debentures at a price lower than their face value, the difference between the face value and the issue price is recorded as a fictitious asset on the balance sheet. This asset is gradually written off over a period of time. The company can either issue bonus debentures or transfer the amount to a debenture redemption reserve account to write off the loss.
It is important to note that fictitious assets can significantly impact a company’s financial statements. Since these assets do not have a physical existence, they may not reflect the true financial position of the company. Therefore, it is crucial to carefully analyze a company’s balance sheet and income statement to understand the impact of fictitious assets on its financial position.