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Advertising Expense: Definition and Example



Definition of advertising expense

Advertising expense refers to cost incurred in promoting a business, such as publications in periodicals (newspapers and magazines), television, radio, the internet, billboards, fliers, and others. Since the accountants cannot measure the future benefit of the advertising, the advertising costs must be reported as Advertising Expense at the time the ads are run.

A prepayment of the cost of ads that will air in the future should be recorded in a current asset account such as Prepaid Advertising. When the ad is aired, the amount must be transferred from Prepaid Advertising to Advertising Expense.

Classification and presentation

Advertising Expense is an expense account. It is part of operating expenses in the income statement. Sometimes, companies pay for advertisements in advance to media companies. These advanced payments are treated as assets (prepaid advertising) and only become part of expense once the advertising services have been performed.

Journal entries

  • The basic journal entry to record advertising expenses and the payment of such is

Advertising Expense

xx.xx

 

Cash

 

xx.xx

  • If the business pays for advertisements in advance, the journal entry would be:

Prepaid Advertising

xx.xx

 

Cash

 

xx.xx

  • When the advertising service has been performed, prepaid advertising shall be transferred to advertising expense.

Advertising Expense

xx.xx

 

Prepaid Advertising

 

xx.xx

Examples of advertising expense

Let's assume that in April a corporation paid Rs 15,00,000 to prepare an ad and to book a time for it to be shown during the IPL match in early June. Until June, the Rs 15,00,000 is the current asset as prepaid advertising. After the ad is shown in the IPL match, the corporation must credit prepaid advertising and debit advertising expense. This is necessary because the accountants cannot measure the sales (if any) that will occur because of the IPL ad.


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