How Should You Categorise the Expenses for Advertising?

How Should You Categorise the Expenses for Advertising

Besides engaging an accounting firm in Johor Bahru to manage your accounting-related tasks, as a business owner, you should not neglect marketing and advertising to generate sales for your company. Advertising refers to any communications between a company and its target audience, which aims to convince the audience to take a certain action, for example, to purchase the products or services of that company. Besides, advertising may seek to raise the awareness of people towards a brand or an industry. There are many ways of advertising, which includes banner ads on a website, billboards, radio announcements and others. Advertising expense is the cost incurred when you conduct these activities.

Some accountants (Also see Common Myths About Accounting Profession) may tell you to classify an advertising expense as an asset if you can see a demonstrated and dependable relationship between the sum of the cost incurred and the future benefits it can bring to you. As an instance, based on reliable evidence, you can make sure that if you send out 10,000 pieces of direct-mail advertising, you will get 500 responses. Hence, the cost you spent on sending 10,000 pieces of mailings is the cost incurred for you to gain 500 responses. By using this information, you may utilise historical information you have to predict the relationship between the expenditures you need to spend in the current period to earn revenue in the future. If you have historical information like this, you may accrue advertising costs using the necessary double entries posting.

That is really not something you want to adhere to and you know those aren’t professional accountants when they tell you so (Also see Tips on How to Sort Out Your Chaotic Finances). In fact, when the risk and reward is transferred (or when the service is consumed), the advertising fee should be catergorised as expenses. If you paid for services to send out direct mail over a period of time, you should charge them to expenses when the mails were sent (E.g. 1,000 mails per month).

Whether the advertising expense incurred is for direct-response advertising or otherwise, the concept still applies. Advertising costs should never be capitalised just because of the expectation of future economic benefits although it might be “deferred” to the period of which the expense is actually incurred as demonstrated above.

Finally, if you are running a small business, you should be careful of the economic entity principle (Also see Basic accounting concepts). This principle states that the records of the owners and the documents for their company should be separated. Thus, you should never record any advertising costs, which are more related to the owners than the company as the business’s expenses.