Fictitious Asset is a fake asset that does not have physical existent, and it does not meet the requirement of the intangible asset, so technical it is not the asset at all. However, the company presents it in the balance sheet as an asset due to its huge amount of expense which cannot claim in the income statement as it will cause a huge loss.
Fictitious assets are not the asset in business and there is no realizable value besides the cash outflow. It supposes to classify into expenses, but the company decides not to do so.
The purpose of Fictitious Asset is to delay the recognition of the expense and defer it to the future period. The company does not acquire this asset. It is the accounting treatment that results from the adjustment of expense into the asset account.
Fictitious Assets Example
There are several examples of fictitious assets which we can separate into a few main topics as following:
These are the expense which occurs before the business is officially corporate, so the company record it as an asset and amortize them over time. The company does not record it into income statements in the first year as it is not relevant to any specific accounting period.
The promotional expense of a business
Some entities require to spend a huge budget on promotion of product, service, or even the brand itself. After building a good brand, the company can utilize it overtime and it will not necessary to promote more in the future. With this scenario, the company will classify it as an asset and reverse it to expense in the future.
Discount allowed in an issue of shares
It is the expense that incurs during the company issuing new shares, it should the expense which record in the income statement. However, this transaction is not directly related to a particular accounting period, so we can amortize it over a number of years. The remaining balance will record as an asset.
Fictitious Assets vs Intangible Assets
Intangible assets are assets that do not have physical substance and we cannot see or touch. However, they meet the definition of assets while the fictitious assets just the expense which not yet reclass from the balance sheet. For example, goodwill is the intangible asset that occurs when a parent purchases a company’s major share. It represents the company’s reputation in terms of monetary valuation. In conclusion, goodwill is not a fictitious asset, but it is an intangible asset.
Fictitious Assets Journal Entries
Journal entry for fictitious assets may be different base on the type of expense. We can separate the entries into two which are the recognition into the balance sheet and reclass to expense.
- Recognition into the balance sheet. The company decides to recognize fictitious assets base on the above criteria, so they need to make journal entries as below:
- Reverse from balance sheet to income statement. Depend on the type of fictitious assets, they will be reclassed back to the income statement over a period of time.
In the end, the fictitious assets will be zero, all expenses are recognized over the appropriate accounting period. The process is similar to the depreciation of the fixed assets, but again it is not the asset.
How to write off fictitious assets
In some circumstances, we need to write off fictitious assets before the expected date. So we have to write off fictitious assets. We usually do it when the company makes profit which is significant enough to handle this kind of huge expense.
Fictitious Asset write off in Cash Flow Statement
Fictitious asset write off is the non-cash flow expense, it’s debit in the income statement. We have to add it back while preparing cash flow statements. We add the non-cash expense to the net income to get the net cash inflow.
Fictitious Asset Vs Wasting Asset
A wasting asset is an asset which decreases the value over the limited useful life. Its value will decrease to zero at the end of useful life. It also called the consumable asset as they have nothing left at the end of life, it cannot recycle. For example, natural oil, gas, and timber.
This kind of asset share some nature with fixed assets which requires depreciation over their life. However, fixed assets may retain some value at the end, which is called the residual value.
So it is completely different from fictitious assets as they do not have a useful life at all. They will be written off as soon as the company making the first profit.