Is an advertising expense an asset?

You are a business owner, and you are advertising. That is wonderful for your business, sales team, and customers. Your CMO is doing cartwheels, and your Sales Director is smiling from ear to ear. Still, the practical-minded members of your team may be asking, "Is an advertising expense an asset?"

Advertising expenses are what type of account?

Advertising is only recorded as an asset—rather than under the liabilities category—when there is a reliable and demonstrated relationship between total costs and future benefits resulting directly from the incurrence of those costs. For example, if you have reliable evidence that a mailing campaign will generate $x revenue, the campaign cost can be considered an asset and included on the balance sheet.

There are certain circumstances when advertising expenses are capitalized—meaning they are an asset and have a future economic benefit—but generally, advertising expenses are considered operating expenses and included on the income statement. 

Where to put an advertising expense on a balance sheet

Operating expenses are expenses that a company incurs as part of its normal business operations and are subtracted from revenues to determine net income.

In general, advertising costs are simply a cost of doing business and are recorded under operating expenses in the liabilities category.

There are a few exceptions, and our team of accounting experts can help you navigate these complex accounting rules to ensure that your financial statements are accurate and compliant.

In short, business owners should be mindful of the following:

1. Advertising expenses on a balance sheet
2. Income statement reporting
3. Matching principle, amortization, prepaid advertising, and accruals
4. Legal and tax implications

Is an advertising expense a debit or credit?

Both! Typically, when advertising is deemed an operating expense, it is recorded as a debit to the advertising expenses account and a credit to cash and accounts payable. If they are an asset, you must record them accordingly. Before your books become unbalanced, speak with an experienced professional at Kordis.

Map out your accounts. Account for your plans.

When it comes to advertising expenses, there are a few things to keep in mind, such as the matching principle, amortization, and prepaid advertising.

Matching principle

The matching principle means that advertising expenses are recorded in the same period as the revenue they generate. For example, if an advertising campaign is run in December and generates revenue from that campaign in January, the advertising expenses are recorded in December.

Amortization

When an advertising expense is an asset—thus it has a future benefit to the company—it can be amortized over time. For example, if a company creates a jingle they plan to use for several years, the cost may be considered an asset and amortized over the useful life of the jingle.

Prepaid advertising and accruals

Two questions often arise: "Is prepaid advertising an asset and how do I record an accrued expense?" The latter is also called an incurred advertising expense on account, but the meaning is the same.

Unless there is a documented and reliable future benefit to the business, both are operating expenses. Prepaid advertising is an amortized expense over the period the advertising will run, and an accrued expense is recorded when the advertising occurs, not when it is paid.

However, prepaid advertising and accruals add another layer of complexity to your accounts, and the subtleties can have wide-ranging implications for your business. Speaking to a Kordis professional can alleviate your concerns.

Wading through the legalese and tax parameters

When it comes to advertising expenses, there are a few legal and tax considerations to keep in mind:

• Advertising costs are usually tax-deductible expenses. However, there are some exceptions to this rule.
• You must be able to demonstrate that your advertising expenses are ordinary and necessary expenses for your business.
• Your business must comply with the financial accounting standards related to advertising expenses.
• The Internal Revenue Service (IRS) has specific regulations and compliance requirements related to advertising expenses incurred by your business.

Next time you want to know if an advertising expense is an asset, contact a Kordis professional and let the experts keep your books balanced and compliant. Working with Kordis can help ensure your business adheres to all accounting principles, legal requirements, and tax parameters placed on advertising expenses.

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