Advertising Costs: Definition and How It Works in Marketing

What Are Advertising Costs?

Advertising costs are a type of financial accounting that covers expenses associated with promoting an industry, entity, brand, product, or service. They cover ads in print media and online venues, broadcast time, radio time, and direct mail advertising.

Understanding Advertising Costs

Advertising costs will in most cases fall under sales, general, and administrative (SG&A) expenses on a company's income statement. They are sometimes recorded as prepaid expenses on the balance sheet and then moved to the income statement when sales that are directly related to those costs come in.

For a company to record advertising expenses as an asset, it must have reason to believe those specific expenses are tied to specific future sales. Then, as those sales occur, those advertising expenses are moved from the balance sheet (prepaid expenses) to the income statement (SG&A).

Advertising costs are typically not a surprise to a business owner. In fact, many will have budgeted for a certain amount of advertising costs. The U.S. Small Business Administration notes that most companies set their marketing budget based on revenues.

Many small business owners report spending as little as 1% of their annual business income on advertising. If you single out manufacturers and wholesalers specifically, the number is closer to around 0.7% of annual revenues spent on advertising as of 2020.

Simply spending the money is no guarantee, of course, that a business will get the return on investment they want with their ad expenditures. As such, business owners need to make sure they're spending their advertising budget in the right places, where the audience is likely to include potential buyers of their product or service. Some media outlets offer a 40%–50% discount for running ads in slots left open due to cancellations.

Whatever a business spends on advertising, the point is to maximize the ROI of advertising costs. This can be difficult because there is no shortage of advertising opportunities out there to consider. The best bet is to settle on a set of business goals and build a program around those.

Example of Advertising Costs

For example, if a company launches a direct mail campaign and it knows that future sales are due to that campaign, it will record the cost of the campaign on its balance sheet as an asset, a prepaid expense. Over time, as customers respond to the campaign, those direct mail expenses will be moved from the prepaid expense category to the advertising cost category.

The company must be able to demonstrate that those advertising expenses are directly related to those sales. It may use historical data as evidence to do so. That is, if the company knows, for example, that in the past when it sent out 1 million pieces of direct mail, it received 100,000 responses, it may apply this ratio to future sales coming from a future direct mail campaign.