2 Million will be shown in the income statement whereas the remaining (4/5th) 8 Million will be shown in the balance sheet as a fictitious asset (under the head Miscellaneous Expenditure). Preliminary Expenses is not an asset. Assets which are fictitious and does not represent any real value are called as Fictitious Assets. Therefore, it can be seen that fictitious assets are intangible assets with no physical existence. The word Miscellaneous means items of varied or different sources. The company would build an asset for example, a power plant and immediately . Depending on the type of expense, the journal entry may differ. Continue with Recommended Cookies. They are not assets at all, however, they are shown as assets in the financial statements only for the time being. The consent submitted will only be used for data processing originating from this website. The cookies is used to store the user consent for the cookies in the category "Necessary". If you would like to change your settings or withdraw consent at any time, the link to do so is in our privacy policy accessible from our home page.. Discount on issue of shares. The consent submitted will only be used for data processing originating from this website. Examples of Fictitious Assets- Advertisement Suspense Account, Discount on issue of debentures, Underwriting Commission, Preliminary Expenses, Profit and loss (Debit balance), Deferred revenue Expenditure, Expenses on issue of debentures, Expenses on issue of Shares etc. Accounting is a vast subject and requires continuous study to have good understanding of the concepts. Ensures following of the Matching concept of recording the expenses against the relating income. Discount on issue of Debenture/Equity or Preference shares. Which is not an example of fictitious assets? Some of our partners may process your data as a part of their legitimate business interest without asking for consent. Intangible assets provide financial value. They are to be transferred to the Partners Capital A/c. Hence, they are then spread across several years instead of being treated as such during the course of one year only. Fictitious assets are the expenses or losses which are not fully written off (not offset in the Profit and Loss A/c) during particular accounting period. Examples of these assets include the ones listed above. Payment of excess price over and above the book value results in recording Goodwill in the books. Large Construction Company is into the business of Pharmaceuticals. It is the accounting treatment that results from the adjustment of expense into the asset account. The financial risk is reduced by paying a fee to the underwriters. Examples of Fictitious assets are Deferred Revenue Expenses, Preliminary Expenses, and Discount on Shares issued. Fictitious capital (German: fiktives Kapital) is a concept used by Karl Marx in his critique of political economy.It is introduced in chapter 25 of the third volume of Capital. The value of these assets is periodically reduced through the process of amortization over a number of years. Preliminary Expenditure - Expense that is incurred at the initial stage or at the time of formation of company. Examples of these assets include promotional and incorporation expenses paid at the start of the business. Goodwill is an intangible asset and it derives it value when entity acquires another business. Performance cookies are used to understand and analyze the key performance indexes of the website which helps in delivering a better user experience for the visitors. So, these assets are not recorded for fraud purposes. Examples of Fictitious Assets: Preliminary Expenses Share Discount Underwriter Commission Tangible Assets An asset that has a real existence and which is visible is called a tangible asset. Fictitious assets are expenses or losses which are not written off completely during the accounting period of their occurrence. It is the expense that incurs during the company issuing new shares, it should the expense which record in the income statement. Underwriters are the investment bankers who help the entities in raising securities. Goodwill = Purchase price of the targeted/acquired company (Fair market value of the total assets of the acquired company Fair market value of the total liabilities of the acquired company). 2. So, we have added related topics below for reference. Functional cookies help to perform certain functionalities like sharing the content of the website on social media platforms, collect feedbacks, and other third-party features. Usually, these include expenses companies want to spread over a specific period. Further, these expenses have already been paid. Fictitious Assets are deferred revenue expenditures with no resale value. The entry will be. Further, these expenses results in very existence of a company. Book value of Small Company Net assets (Assets after reducing the liabilities) is $10K. Its usually done to window-dress the performance of the company. Amortizing all these expenses in the first year of operations is not appropriate. This is an accounting FAQ based on the concept of partnership accounting. Therefore, they are categorized as assets first and then continually amortized over time. Promotional marketing expenses (material in value) Loss incurred on the issuance of the debentures Suppose a small company decides to spend a large sum of 10 Million on marketing a new product and the benefit of such an expense is to last for 5 years. Can Depreciation be Charged on an Asset in the Year of Sale? For example, if the face value of a share is 25 and the company issues it at 20, then 5 (25 20) is the discount provided by the company on the issue per share. Now, we understood the above three terms and will see whats the logic behind the treatment of fictitious assets. Why debt is a cheaper source of finance than equity? 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. Preliminary expenses paid by the business (For instance, expenses paid for the incorporation of the business). So, all the GL accounts having debit balance is comes under assets side of balance sheet. With this scenario, the company will classify it as an asset and reverse it to expense in the future. Because the interest rate can. Which is example of fictitious assets Mcq? By actively contributing to revenue generation, they add value to the process. This expectation may or may not go as planned and as time progresses, further modifications may be needed. However, it is not true for goodwill, patents, and copyrights, since they all have a monetary value and can be sold in the open market. To sum up, preliminary expenses are an example of fictitious asset. Some entities require to spend a huge budget on promotion of product, service, or even the brand itself. Net of Fixed Assets: Definition, Formula, Examples, on Balance Sheet, Stay up-to-date with the latest news - click here, Advance to Suppliers: Definition, Accounting, Journal Entry, Examples. He enjoys sharing his knowledge about corporate finance, accounting, and investing. Promotional marketing expenses (material in value), Loss incurred on the issuance of the debentures. We add the non-cash expense to the net income to get the net cash inflow. Fictitious assets have no physical existence or realisable value, but the company shows them as a cash expenditure in the books of accounts. Such assets have a broad spectrum of roles and usage in a business. Small Company is into the Footwear business for more than a decade. Examples Promotional marketing expenses. If in the above example, these expenses benefit for more than one accounting period, we recognize those expenses as fictitious assets over a period. The Promotional (Marketing) expenses of the company, The Discount allowed on the issue of shares. In a world that is so often full of big things and overwhelming events, it can be easy to forget the small things. This video. The economic impact of COVID-19 may have created incentives and opportunities to record fictitious revenue. Preliminary Expense is in nature of Capital item. They are assets only in the name and do not play a role in revenue generation. However, during the first year of operations, they were not able to make a substantial profit. Difference Between Current Assets and Liquid Assets. It is important to note that such assets do not exist physically or have any resale value. Syndicate Loan: Definition, Features, Participants etc. Such treatment is based on the expectation that it will be beneficial to the business in the long run. Following are some of the examples of fictitious assets, Preliminary expenses paid by the business (For instance, expenses paid for the incorporation of the business). Fictitious revenue involves claiming the sale of goods or services that did not occur, such as double-counting sales, creating phantom customers or overstating or otherwise altering the legitimate invoices of existing customers. The cookie is set by the GDPR Cookie Consent plugin and is used to store whether or not user has consented to the use of cookies. There are numerous different examples of fictitious assets. Preliminary expenses is example of this asset. As per Matching concept, amortization of expenses shall be against the related revenue until the period to which the benefits arise. It cannot be depreciated or sold once it is paid for. Shares are issued at discount to attract more investors. Deferred Revenue Expenditure (Such as Advertising or Marketing expenses, Promotional Expenses). These two assets are not the same. Want to re-attempt? Journal entry at the time of payment of expense. 2 Which is example of fictitious assets Mcq? A common example of a fictitious asset is business START-UP COSTS. The assets are those valuable things or properties which the business or individual owns and get the benefits from it in the future or use in generating income . We have to add it back while preparing cash flow statements. These fictitious assets are different from the intangible assets like goodwill. This helps consumers to know about the company. Which is the following fictitious assets? These assets are intangibles and not realizable. The remaining balance will record as an asset. cost incurred before the start of business operations is termed as preliminary expenses. Accounting Treatment for the same is different. Fictitious assets have specific characteristics that separate them from intangible and other assets. 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