What are Advertising Costs
Advertising costs are a category in 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. Advertising costs will in most cases fall under Sales, General & Administrative (SG&A) expenses on a company's income statement.
BREAKING DOWN Advertising Costs
Advertising costs are sometimes recorded as a prepaid expense 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).
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.