Numerous companies have grown from small-scale operations to multinational enterprises over the years. It takes firm decision-making and vision to understand what steps you need to take to help your company letter, and one of such crucial steps is fictitious assets.
Fictitious assets are the assets that have no physical existence and yet are represented as actual cash expenditure. Assuming that you already know the basics of fictitious assets in accounting, here are four types of fictitious assets that you should know.
4 Types of Fictitious Assets
Promotional and marketing expenditures
No matter how revolutionary a product you have, it has to reach suitable customers. That is why companies spend a lot of money promoting and marketing their products and services. This cost of marketing helps millions of potential customers. When these customers buy the products, it helps increase the company’s profits. That means the marketing expenditure can yield results over the years and help to generate more revenue, making it a fictitious asset. It is tangible but still treated as a regular expenditure in accounting journals.
On top of that, marketing operations are an ongoing process. Businesses don’t put all their marketing budget at once and wait for the results to appear magically. These are gradual expenses incurred over the years and are treated that way. It can be challenging to gauge the direct returns of marketing investment, but it creates leads that generate revenue when converted into customers.
Preliminary expenses
There are a lot of preliminary processes involved when a company takes its baby steps. Preliminary expenses are the expenditure incurred during the initial phases of the company. It consists of the capital cost, cost of incorporations, licensing fees, legal fees, and various other expenses that help build its strong foundation. Such payments may not have immediate returns, but they are very beneficial for the company in the long haul. The incorporation helps in various corporate compliances. The money spent on legal procedures secures the company from any possible lawsuits or legal problems in the future. That is why preliminary expenses are considered fictitious assets written off over several years.
Discount on the issuance of new sales
Companies often go through a cash crunch and pour money into the business. Taking term loans from the banks is not always a suitable solution. In such cases, companies liquidate the ownership by sharing the capital. It gives preference to the current shareholders by offering them a discount on the shares.
These discounts help companies to raise money in times of financial crisis. That is why the deductions on the issuance of shares are considered fictitious assets in accounting. These discount expenses occur over the years and are not amortized in a single accounting period.
Discount on the issuance of debentures
The discount or loss on the issuance of debentures is written off during the lifetime of the debenture, making it a fictitious asset. Its benefit is accumulated until their reinstitution or redemption, which takes place over multiple accounting periods.
There’s a fine line between intangible assets and fictitious assets. These are the long-term expenditures done for a better future of the company and are treated as regular expenses during the journaling.
