Sign In

For the sake of quality, our forum is currently "Restricted" to invitation-only. In case if you wish to join our forum, please send an email seeking an invitation to "[email protected]".

Forgot Password

Lost your password? Please enter your email address. You will receive a link and will create a new password via email.

Captcha Click on image to update the captcha.

You must login to ask question.

Discy Latest Questions

  1. This answer was edited.

    No, Prepaid Expense is Not a Fictitious Asset. Meaning of Prepaid Expense A prepaid expense is an expense incurred by an entity in advance before receiving such goods or services. The payment made pertains to future reporting period and so it is recorded as an asset. The payment so made earlier shalRead more

    No, Prepaid Expense is Not a Fictitious Asset.

    Meaning of Prepaid Expense

    A prepaid expense is an expense incurred by an entity in advance before receiving such goods or services. The payment made pertains to future reporting period and so it is recorded as an asset. The payment so made earlier shall be treated as an expense in the year of receipt of goods or services. The asset recorded earlier shall be written off proportionately to the expense so accrued.

    Meaning of Fictitious Asset

    Fictitious means “Fake” or “Untrue” and Asset means anything that gets the economic benefit or adds value to the organization. Fictitious asset is not the actual asset as it does not have a monetary value. In other words, it cannot be realised.

    Fictitious Assets can be said to be a Deferred Revenue Expense.

    Now even though you have received the answer that these are not fictitious assets but the question that still arises is  – why are the prepaid expenses not treated as fictitious assets?

    When you read the below para you will no longer have this doubt.

    Why are the Prepaid Expenses Not Fictitious Assets?

    Prepaid expenses and fictitious assets are both of revenue nature. Prepaid expenses are expenses incurred in advance. Since the expense has not yet become due it is recorded as an asset. If such expense becomes due in the next reporting period it shall be treated as a current asset otherwise a non-current asset.

    For Example,

    You have taken a showroom on rental basis and you are supposed to pay an amount of 10,000 every month as a rental expense. You have a surplus fund and hence, you have paid 2 months advance rent concerning the next reporting period.

    The amount of 20,000 paid shall be treated as a prepaid expense in the current reporting period and presented as a current asset in the balance sheet and the next reporting period at the end of each month, it shall be written off and treated as an expense in the income statement.

    Fictitious assets are deferred revenue assets and thus are unusually heavy expenses. These are spread over for more than one reporting period and hence are recorded as a non-current asset but these are not actually an asset and so they are treated as fictitious assets. They may or may not provide any future benefit.

    For Example,

    Preliminary expenses are fictitious assets since these are already incurred but are spread over more than one reporting period and they do not provide any future benefit.

    The Accounting Treatment of Prepaid expense:

    At the time of incurring the expense

    Pre Paid Expense A/cDebitDebit the increase in an asset.
    To Cash A/cCreditCredit the decrease in an asset.

    The balance sheet given below shall be of some help to understand this:

    Prepaid expenses in Balance Sheet

    At the time such expense becomes due –

     Expense A/cDebitDebit the increase in an expense.
    To Pre Paid Expense A/cCreditCredit the decrease in an asset.

    The income statement given below shall be of some help to understand this:

    Prepaid expense in income statement  Treatment of Prepaid Expense in the income statement


    Aastha.

    See less
    • 0
  1. This answer was edited.

    Prepaid expenses refer to the advance payment of goods or services the benefits of which shall be received in the future. Expenses such as prepaid rent, insurance, etc. are shown in the trial balance on the debit side as they are initially an asset for the business, however, once the benefit is receRead more

    Prepaid expenses refer to the advance payment of goods or services the benefits of which shall be received in the future. Expenses such as prepaid rent, insurance, etc. are shown in the trial balance on the debit side as they are initially an asset for the business, however, once the benefit is received, the value of the asset falls. I would like to explain this further with the help of an example which is as follows:

    Example

    The trial balance of ABC Ltd. shows the rent amounting to 4,500 as a prepayment for April.

    This prepaid rent of 4,500 is shown in the trial balance as follows:

    Trial Balance as on 31st March, yyyy

    PARTICULARSDEBITCREDIT
    Debtors50,000
    Cash4,000
    Sales1,30,000
    Purchases90,000
    Bank Loan50,000
    Retained earnings2,000
    Salary5,000
    Prepaid rent4,500
    Creditors26,500
    Plant & Machinery40,000
    Investments15,000
    2,08,5002,08,500

    Note

    • If the prepaid expenses are already shown in the trial balance it means that an adjusting entry has already been recorded in the books of accounts and they shall be further recorded only in the balance sheet of the company.
    • It shall be shown in the balance sheet of the company under current assets.
    • However, If prepaid expenses are not shown in the Trial balance then these expenses, shall be added to their respective account and recorded on the debit side in the Profit and loss a/c.

    Hope this helps.

    See less
    • 0