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John Hay

Is prepaid expense a fictitious asset?


1 Answer

  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 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/c Debit Debit the increase in an asset.
    To Cash A/c Credit Credit 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/c Debit Debit the increase in an expense.
    To Pre Paid Expense A/c Credit Credit 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


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