Advertising ExpenseExplained with Journal Entry Examples

Written By:
Lisa Borga

Advertising expense refers to all of the costs an organization incurs in promoting its goods, services, or brand.

This includes advertising through television, the internet, print publications, fliers, billboards, and any other techniques used for promotional purposes.

How Advertising Expense Works

Advertising is a crucial business activity that makes potential customers aware of a company’s products or services.

In order to increase awareness, companies will pay for promotions such as billboards, radio and television advertisements, as well as many other potential formats.

In most cases, the future benefits that advertising may offer often cannot be precisely determined, so these costs will be reported at the time that they are incurred.

This will generally be recorded as an operating expense on the income statement.

However, if a company believes that certain future sales can be directly connected to advertising expenses, they will be recorded on the balance sheet as a prepaid expense until those sales are occurring, at which point the costs will be moved to advertising expense.

A company must have some means to prove that sales are connected, and it may do this through methods such as using historical data to show a relationship.

Another reason that advertising costs may be on the balance sheet as a prepaid expense is when a company pays for advertising that will be performed at a future time.

In the case of prepayments for advertising that will occur on a future date, the cost will be recorded as a current asset in a prepaid expenses account until the advertising services have been performed, at which point it will be moved to the advertising expense account on the income statement.

Journal Entries for Advertising Expense

The journal entry for recording the payment for advertising expenses would be:

Should the business pay in advance for advertising, the journal entry would be as follows:

After the advertising service is provided, the amount in prepaid advertising needs to be transferred to the advertising expense account.

At the end of an accounting period, the company will need to make adjusting entries to update its accounts.

A sample adjusting entry is shown below.

Examples

Company X entered a contract with Company ABC to produce and distribute advertising posters.

After the job was completed, Company X paid Company ABC $2,000. The journal entry follows.

On Dec. 1, Company X started a three-month advertising contract with Firm Y and paid $3,000.

The Firm will play the advertisement twice a day for three months.

The journal entry for this transaction appears below.

On Dec. 31, the company has already used a month of its advertising.

The adjusting entry the company would use to record the necessary transfer of this part of its prepaid advertising to the advertising expense account is shown below.

It will be necessary to make adjusting entries when each accounting period ends, which is generally the end of the year.

But, some companies prefer to make monthly adjusting entries in an effort to make their monthly financial statements more accurate.

Payments that are made in advance can also be recorded first to Advertising Expense and then changed later through an adjusting entry in which the unused part would be transferred to prepaid advertising.

Either of these methods will produce the same result in the accounting records.

Whichever method is used, the used part should be recorded as the advertising expense, and the unused part should be recorded as the prepaid expense.

Why Should a Business Advertise?

Businesses advertise in order to increase their sales. Advertising can be used to increase a business’s brand awareness or to introduce new services or products.

Studies tend to confirm that advertising is an effective way to increase revenues.

How Can Businesses Tell If Their Advertising Money Is Being Used Effectively?

There are metrics a business can use to evaluate the effectiveness of its advertising.

One very useful metric is the advertising-to-sales ratio.

This ratio is calculated by dividing advertising costs by overall sales during a specific period.

What Is a Good Amount for a Business to Spend on Advertising?

The amount can vary a lot between businesses.

The important thing is to make sure that you are getting a good return on your advertising money.

Design your advertising campaign to appeal to your target customers.

Key Takeaways

• Advertising expense includes all costs which are for the marketing of a brand, good, or service.
• Advertising may occur through many formats, including the internet, billboards, print publications, radio, and many others.
• In some cases, including prepaid advertising, and when future sales can be directly connected, the cost of advertising may be recorded as a prepaid expense on the balance sheet before being moved to advertising expense on the income statement.