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.
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.
1. The basic journal entry to record advertising expenses and the payment of such is:
2. If the business pays for advertisements in advance, the journal entry would be:
When the advertising service has been performed, prepaid advertising shall be transferred to advertising expense.
The entry above is an adjusting entry. Adjusting entries are required at the end of every period to check and update the company's accounts.
1. MADERA Co. contracted GEM Marketing Company to produce and distribute brochures. After the services were performed, MADERA paid GEM $3,000. The journal entry would be:
2. On December 1, 2020, HAIKU Corp. entered into a 3-month advertisement contract with BRASS Network and paid $6,000. The company's advertisement will be played 3x a day for 3 months. In the books of HAIKU, the journal entry to record the advanced payment would be:
On December 31, 2020, 1-month worth of advertising expense has already been used up. The adjusting entry to record the transfer a part of prepaid advertising to advertising expense would be:
(6,000 x 1/3)
Adjusting entries are required at the end of every accounting period (usually every year). However, if the company wants to have more accurate monthly financial statements, then monthly adjusting entries must be prepared.
Advanced payments may also be initially recorded to "Advertising Expense". The adjusting entry later on would then be to transfer the unused part to "Prepaid Advertising". Both methods will produce the same effect in the accounting system. In any case, advertising expense should be equal to the used part, while prepaid expense should be equal to the unused portion.