Advertising expense is the amount of money a company spends running ads during a specific period. The company categorizes it in selling, general and administrative expenses in the income statement.
Types of advertising expense
Advertising helps companies to increase their exposure to the target market. Through it, customers know about various products and their prices. To satisfy their desires, they can choose from a variety of brands.
Advertising expenses can take a variety of types, including:
- Placement costs in various media such as newspapers, TV, internet, cable, and magazines
- Online activities such as pay-per-click advertising and SEO services
- Advertising production costs, including copywriting, video production, post-production editing, layout, and design.
- Commissions that companies pay to the advertising agencies.
How do companies treat advertising costs in accounting?
In accrual accounting, companies charge advertising costs when they occur because accountants cannot measure the future benefits of advertising. The company reports on the sales, general, and administrative expenses in the income statement.
However, in some instances, the company might record it as an asset. In this case, the company must have a specific reason that the advertisement is related to specific sales in the future. Therefore, as purchase occurs, the company then moves the prepaid expense account to the income statement.
For example, in December, the company paid Rp300 million for advertising on a television station that aired a soccer match. Meanwhile, the football match will run in March.
Based on accrual accounting, before the match took place (March), the company recorded the expenditure as an asset, i.e., in the prepaid expenses. After the game starts, the company credits the prepaid expense and debits advertising expenses.