No, Goodwill cannot be called a fictitious asset. A fictitious asset does not have any physical existence or realizable value. Although it is recorded in the assets column, it is not really an asset, rather it is an expense that is incurred during the accounting period. Its benefit, however, is realRead more
No, Goodwill cannot be called a fictitious asset.
A fictitious asset does not have any physical existence or realizable value. Although it is recorded in the assets column, it is not really an asset, rather it is an expense that is incurred during the accounting period. Its benefit, however, is realized for extended periods. This is why they are recorded as assets. They are recorded in a single year and are amortized over the years. A fictitious asset is neither tangible nor intangible.
Examples of Fictitious Assets
- Preliminary expenses
- Promotional expenses
- Discount on issue of shares/debentures etc.
Now, goodwill is an intangible asset that relates to the purchase of a company. It is the amount that a company pays over the net worth of the company being purchased. This can be because of its brand value, good customer base, etc. As a company’s reputation improves, its goodwill increases accordingly. Therefore, It does not have a tangible existence but it does have a monetary value. They are also recorded on the asset side of the balance sheet under the head “Intangible assets”.
Reason for not being a fictitious asset
Since goodwill is an asset and not an expense, it cannot be called a fictitious asset. Moreover, goodwill has a realizable value. Unlike fictitious assets, goodwill can be purchased or sold. Therefore, goodwill is termed as an intangible asset but not a fictitious asset. The major difference between an intangible asset and a fictitious asset is:
Negative working capital means the excess of current liabilities over current assets in an enterprise. Let’s understand what working capital is to get more clarity about negative working capital. Meaning of Working Capital Working Capital refers to the difference between current assets and current lRead more
Negative working capital means the excess of current liabilities over current assets in an enterprise.
Let’s understand what working capital is to get more clarity about negative working capital.
Meaning of Working Capital
Working Capital refers to the difference between current assets and current liabilities of a business.
Working Capital = Current Assets – Current Liabilities
It is the capital that an enterprise employs to run its daily operations. It indicates the short term liquidity or the capacity to pay off the current liabilities and pay for the daily operations.
Items under Current Assets and Current Liabilities
It is important to know about the items under current assets and current liabilities to understand the significance of working capital.
Current assets include cash and bank balance, accounts receivables, inventories, short term investments, prepaid expenses etc.
Current liabilities include accounts payable, short term loans, bank overdraft, interest on short term interest, outstanding salaries and wages etc.
Types of working capital
Since the working capital is just the difference between current assets and liabilities, the working capital can be one of the following:
Hence, negative working capital exists when current liabilities are more than current assets.
Implications of having negative working capital
Having negative working capital is not an ideal situation for an enterprise. Having negative working capital indicates that the enterprise is not in a position to pay off its current liabilities and there may be a cash crunch in the business.
An enterprise may have to finance its working capital requirements through long term finance sources if its working capital remains negative for quite a long time.
The ideal situation is to have current assets two times more than the current liabilities to maintain good short term liquidity of the business i.e.
Current Assets = 2(Current Liabilities)
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