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What Are Fictitious Assets?


There are three types of assets

1. Fixed assets
Those assets which will be used by the company for a long period of time.
a) Tangible assets: those assets which we can see and touch and exp Land & Buildings, Plant & Machinery,Furniture, fixtures and fittings
b) Intangible assets: Those assets which we can’t see and touch like Goodwill, Patents, Copyrights, Trade Mark etc

2. Current assets
Those assets which can be easily converted into cash within one year like cash in hand, cash at bank, Bills receivable, stock etc

3. Fictitious assets:
Its not the actual assets , its the expenditure occurred at the tine of commencement of firm ( capital expenditure )like preliminary expenses, discount on issue on debenture/shares, underwriting commission etc

What Are Fictitious Assets?

Companies can have multiple asset types that help them run operations. One asset classification is fictitious assets. These are not very popular for companies to list on their balance sheet, which is how companies report assets. Fictitious assets can also create controversy if the items are on the balance sheet for the sole purpose of making the company look better financially.

Definition
Fictitious assets are the result of an accounting entry. No physical item backs up the entry reported on the company’s financial statements. A common example of a fictitious asset is business start-up costs. Accountants record these costs as an asset because they do bring some value to the new business. The company may need to write off this fixed asset against earnings, however, to properly report all tangible and intangible assets on the balance sheet.

Goodwill
Another common fictitious asset is goodwill. This asset represents an amount over and above a company’s actual valuation. For example, Joe is going to purchase Widgets International, and the company has an actual value of $50,000. Joe offers $70,000 as the purchase price, with the $20,000 excess being the goodwill associated with the offer. Joe records the excess amount paid as goodwill, as allowed by generally accepted accounting principles.

Classification
Goodwill — although a fictitious asset — is typically an intangible asset for recording purposes. Though the item is a fictitious asset because it is not real, GAAP requires the item to be recorded as an intangible asset. The purpose for this is because a company will not need to immediately expense any amount of goodwill recorded through a business purchase. Goodwill does retain some value through multiple accounting periods for the business.

Fair Value Accounting
Goodwill does not result in a potentially immediate expense for companies after a certain period of time. Companies can leave goodwill on their books for any length of time, depending on their business industry and applicable accounting guidelines. Accountants will need to adjust the goodwill for current market values, however. This requires an evaluation, with accountants writing off a loss of goodwill against earnings.

 

About CA Dushyant Kumar (Maddy)

CA Dushyant Kumar (Author) CA Dushyant is Author and Founder of Carocks. He is a Technology Enthusiast and by profession he is a Chartered Accountant. Loves playing with electronic gadgets and believes in Simple Living. You can reach him at dushyantkumar@hotmail.co.uk | dushkumar2009@icai.org

Discussion

12 thoughts on “What Are Fictitious Assets?

  1. Thankzz its really helpful..

    Posted by Deeksha Sachdev | February 6, 2016, 9:30 PM
  2. Thankzz its really helpful..🙂

    Posted by Deeksha Sachdev | February 6, 2016, 9:29 PM
  3. Good but please clarify me that why goodwill is fictitious asset

    Posted by Atishay Jain | November 2, 2015, 12:10 AM
  4. Well explain.

    Posted by mehak | April 19, 2015, 2:59 PM
  5. Good writte up and well explain.Pls can e-mail me IFRS booklet?

    Posted by amit | December 11, 2013, 7:59 PM
  6. i thought good will is calculated through a revaluator or an auditor

    Posted by amit | December 11, 2013, 7:57 PM
  7. And i thought good will is calculated through a revaluator or an auditor….(y)

    Posted by aaronkeshan gunatilleke | July 30, 2013, 3:05 PM
  8. google ‘fictitious assets’ and you will find it out..

    Posted by rahul | May 25, 2013, 9:52 PM
  9. pls tell some more examples of fictitious assets… is premium allowed on shares come under fictitious assets???

    Posted by Annu Agrawal | February 6, 2013, 4:21 PM
  10. Good writte up and well explain.Pls can e-mail me IFRS booklet?

    Posted by Obasohan Celestine | January 23, 2013, 3:47 PM
  11. Post me with new accounting issues via email.

    Posted by Anthony Wilson Djorkah | December 30, 2012, 1:55 AM
  12. All are good

    Posted by Vishnu tiwari | October 29, 2012, 11:21 AM

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