The Fictitious word, itself says “fake”. So Fictitious Assets are not an asset in the true sense but this is a huge amount of expenses or losses which are unclaimed in profit/loss account during the year in which they are incurred.
These type of expenses or losses are claimed/written off in the next more than one profitable financial years of the business enterprises. So, that is why they are treated as an asset and shown as an asset in the balance sheet.
In other words, Business did not buy Fictitious Assets, they have just created it by accounting treatment. Just posting a journal entry to convert the expenses which have huge value or not claimable in the current financial year into the assets accounts.
Point to be Noted while treating fictitious assets: –
- Fictitious assets have no physical existence or you can say these are intangible assets.
- These type of assets are just expenses which are treated as assets.
- They have no realizable value.
- They are amortized or written off in one then more profitable financial years.
Examples are as follows: –
- Discount on issue of Debenture/Equity or Preference shares.
- Preliminary Expenses.
- Business promotion Expenses. (If it has huge value)
- Any loss on issue of Debenture/Equity or Preference shares.
Now question is that
Why we treated expenses as Fictitious assets?
To know why we treated a huge amount of expenses we have to know the meaning of Assets. Assets are those things from which business get benefits in the near future.
So, according to the meaning of assets, all unclaimed expenses will provide benefits to the business in the near future when they are claimed or amortized.
So, That’s why these type of expenses are treated as assets and shown in the balance sheet.
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