How to Capitalize an Expense

"Dear sir,

I am a student who came from science stream. I don't have a good base in accounting. Firstly my heartfelt thanks for opening an educational website like this. I was learning to make a balance sheet. In that an asset group termed 'fictitious assets came. l am not able to fully understand its meaning. The definition in my text book is as below

""These are virtually not assets.These are either the past accumulated loses or expenses which are incurred once in the life of a business and are capitalized for the time being''

I want to what is this capitalizing of loses. Also how can an expense be capitalized. Also will this continue to be in there in every balance sheet and if it will be, then whether in the same value or changed value.
sir please help me clear my doubt."

Anju Jacob from India

Anju Jacob! Given definition in your accounting book is correct. Both loses and capitalized expenses can be shown in assets side of balance sheet as fictitious assets. First you should understand why these are assets?

When we earn net profit in the business, it will add in the capital or will show in reserve and surplus in the liability side of balance sheet because this increase our capital. When owner will close his business, it is the responsibility of business to give his past profit with his invested capital. But, in case if he got net loss, it will reduce opening capital because net loss decreases the capital. Instead of showing it as deduction from capital in liability side, we can show it as fictitious asset. Effect on capital will be same.

Instead of learning capitalize of loses, it is better to learn, how to capitalize an expense because after making profit and loss account, net loss must be transfer to fictitious asset. So, there is no problem. But you may confuse whether any expenses should be revenue nature or capital nature.

Following tips may be helpful to learn this.

1.# Check the benefits of any expense, if its benefit is more than one financial year, it will be capital expense and it will be shown as asset.

2. # When we paid expenses, see whether acquired asset's useful life is more than one year. If yes, it will be capital expense.

3.#  Remember, all capitalized expenses are not fixed asset some of them may be fictitious and some other intangible. For example preliminary expenses are capital example because we can get its benefit more than one year. Because there is no market value of this, we just show its original cost as fictitious asset. 


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Accounting Education: How to Capitalize an Expense
How to Capitalize an Expense
Accounting Education
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