What is an Advertising Expense?
An advertising expense is a cost to a business of communicating information to customers to try and increase demand for its goods and services.
Advertising expenses for businesses can include traditional television, radio, and print campaigns together with online website advertising and direct mail costs.
As the future value of expenditure on advertising is unknown, the advertising expense is not regarded as an asset of the business and so is not included on the balance sheet. Instead, the cost of advertising is charged in the income statement and reduces the profits of the business in the period in which the cost is incurred.
An advertising expense will normally be classified as an operating cost and included in the income statement under the accounting expense categories of selling, general and administration expenses.
What is Prepaid Advertising?
Prepaid advertising is a cost which has been paid in advance. A prepayment is sometimes referred to as a deferred expense.
For example, a business has an annual advertising of 5,000 and pays yearly in advance on the first day of each year. On the 1 January it pays the next years advertising cost of 5,000 to cover the 12 months of January to December. It has a prepaid advertising expense of 5,000.
Prepaid Advertising Debit or Credit?
The journal entry for the prepayment of advertising would involve a credit to cash, as cash is paid out, and a debit to the prepaid advertising account. A prepayment of advertising like any other prepayment is an asset of the business and is included in the balance sheet.
|Prepaid advertising expense||5,000|
The Advertising Expense Accounting Equation
The Accounting Equation, Assets = Liabilities + Owners Equity means that the total assets of the business are always equal to the total liabilities of the business This is true at any time and applies to each transaction. For this transaction the Accounting equation is shown in the following table.
In this case one asset (prepayments) has been increased by 5,000 and the other (cash) has been decreased by a similar amount.
Further details on the treatment of prepaid expenses can be found in our prepaid expenses tutorial.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.