The purpose of a fictitious asset is to provide a temporary increase in the total assets of a company. These are not tangible, and they have no physical existence. Instead, they come into existence by recording an increase in the value of an asset that does not exist. The most common example of a fictitious asset is preliminary expenses.
But before you learn about these, it's essential to know the preliminary expenses meaning. Preliminary expenses are the expenses that the promoters incur at the time of incorporation of the company. These are not revenue. Instead, they are capital in nature. Hence companies cannot write them off in their profit and loss accounts. This is why they add the preliminary expenses to the asset side of their balance sheet under the name of the fictitious assets.
Another typical example of a fictitious asset is unearned revenue. Unearned revenue is money that has been received from customers but has not yet been earned by the company.
When most fellows think of assets, they think of cash, stocks, and real estate. However, there is another type known as a fictitious asset. These intangible items have value but do not exist in the physical world. Some common examples include trademarks and copyrights.
Businesses often create these to protect their intellectual property. For example, a company might trademark its name or logo to prevent other firms from using them without permission.
While these may not have a physical existence, they can still be valuable. In some cases, they may be worth more than the physical assets of the business that owns them. This is because intangible assets are often unique and challenging to replicate.
When a company spends money on marketing, it is often an investment in the future. This is because a well-executed marketing campaign can increase brand awareness and help to generate new leads and customers. However, not all marketing expenses are created equal. Some investments in marketing may be more significant than others which may be fruitful in the future. Hence promotional expenses are written as fictitious assets.
An example of it in the securities industry is an underwriting commission. An underwriter is a financial institution that agrees to purchase newly issued shares of stock from a company and resell them to the public. In return, the company pays the underwriter a commission. This amount is often a percentage of the value of the shares that are being sold.
When a company offers shares, it can specify a certain amount of money that shareholders will get as a discount. For example, if Company A offers 1,000 shares at $10 each but specifies a 10% discount, shareholders can purchase the shares for $9 each. This is an incentive for people to invest in the company and helps to ensure a market for the company's shares. The discount of $1 is the discount allowed in an issue of shares. And this discount is written as a fictitious asset.
The preliminary expenses meaning is quite simple. When a company is starting up, it will have many expenses. One of these is the primary expense. This includes the costs of setting up the company and getting it ready to do business. This can include legal fees, accounting fees, and the cost of starting up the computer systems needed for the business. These preliminary expenses are included in the balance sheet as fictitious assets.
Fictitious assets come into being when a company records an asset on its balance sheet that does not exist. Companies do this to improve their financial position or inflate the company's value. Awareness of these assets is essential because they can often be used to manipulate the stock market or hide financial problems.