Learn something new every day More Info... by email
A fictitious asset is an accounting entry that does not correspond to a tangible asset and is not an intangible asset. These assets are not really assets at all. The accounting entry places deferred revenue expenditures in an asset account as a holding mechanism until those expenses can be written off against a profit or loss account. This sort of accounting fiction can be legal or illegal, depending upon the intent behind the entry.
Accounting systems are designed to keep track of a company's revenue and expenses and to classify and value assets and liabilities for tax and reporting purposes. Financial accounting for businesses conforms to accounting standards put in place to normalize business reporting, so investors can compare financial records across companies. Business accounting requires bookkeepers and accountants to use a double-entry system that debits and credits the books, taking money out of the company on one side of a transaction to pay an expense and returning an asset to the company that was purchased with the money on the other, for instance.
One of the primary categories that bookkeepers and accountants deal with is assets. Assets are the things that a business owns, such as facilities, equipment, inventory and cash. These items can be classified on the books in different ways. Some assets are considered fixed assets, and some are classified as tangible or intangible assets. All of these classifications relate to something that actually exists in fact, whether you can touch it or it is simply an existing intangible right. The business was able to obtain these assets by making a purchase or receiving a transfer that results in a corresponding entry to an expense account.
In certain circumstances, a business generates expenses that it cannot immediately place in a proper account on the books. For example, a business may have start-up costs that did not result in an asset that now sits in the company's inventory. A business can create a fictitious asset account to hold the expenses until the amounts can be written off against a profit or loss account over time. The fictitious asset shows up on the company's balance sheet as an existing item of value, but does not really exist. It does not have any real value as an asset and cannot be sold.
Using a fictitious asset account is a legitimate way to hold these types of unattached expenditures until they can be properly processed. The situation strays into illegal territory when businesses create a fictitious asset account to defraud investors or to otherwise falsify a balance sheet. In this instance, the business can be held liable to anyone who relied on the misinformation and can be fined or prosecuted by government tax agencies or regulators of securities.