Advertising Expense Journal Entry

Introduction

In business, we may need to make advertisements on different types of platforms in order to make our products or services known to the public as well as to increase the sales in our business. Likewise, we may need to make the advertising expense journal entry many times during the accounting period.

Journal entry for advertising expense may involve prepaid expense in which we need to make an advance payment for the advertising agent or advertising company before we can receive an advertising service. For example, we may need to make a three-month advance payment in order to have our products displayed on a certain advertising platform in the next three months.

In this case, we need to record it as an asset on the balance sheet first and we can only recognize it as an expense when our products are displayed on that advertising platform. This is due to, following the accrual basis of accounting, we should only record an expense when it actually occurs regardless of when we have made the cash payment.

Advertising expense journal entry

We can make the advertising expense journal entry by debiting the advertising expense account and crediting the cash account.

This journal entry is usually made when our company incurs the advertising expense at the same period of the cash outflow from the business. We may see this type of transaction on online advertising as it usually operates the pay per click model or PPC which is common in many online platforms.

This means we will only pay when the target audiences click on our advertising text or banner. And at the end of the month, we will usually see how much we have spent on advertising based on the pay-per-click model and make the journal entry for advertising expense accordingly.

Prepaid advertising expense

However, sometimes, we may need to make the payment in advance for the advertising service. In this case, we need to record the cash outflow when we make the payment to the advertising agent. However, the expense which is advertising expense will only incur and be recorded when we receive the advertising service.

For example, if we make a payment in advance for an advertising service that only starts in the next month, we should record the payment as a prepaid advertising expense first and only transfer this payment amount into the expense account after we receive the advertising service (which is in next month).

Likewise, we can make the journal entry for prepaid advertising expense with the debit of prepaid advertising expense account and the credit of cash account.

Prepaid advertising expense

In this journal entry, the prepaid advertising expense is a current asset on the balance sheet, in which its normal balance is on the debit side. Likewise, there is no expense in this journal entry as the advertising service has not started yet.

Later, when we receive the advertising service, we can make the journal entry for advertising expense by transferring the amount in the prepaid expense account to the expense account as below:

In this journal entry, total expenses on the income statement increase while total assets on the balance sheet decrease. This is due to we have already received the advertising service; hence, the prepaid amount should be transferred to the expense account as the expense has already occurred by this time.

Advertising expense example

For example, in November, we have advertised one of our products online in order to attract more customers to our website. By the end of the month, we see that there is a $1,000 charged for the advertising in November.

In this case, we can make the journal entry for advertising expense by debiting the $1,000 amount into the advertising expense account and crediting the same amount into cash account as below:

In this journal entry, total expenses on the income statement increase by $1,000 while total assets on the balance sheet decrease by the same amount of $1,000 at the end of November.

Example 2:

For another example, on November 20, we make a $3,000 payment to an advertising agency in order to advertise one of our products in a local magazine. This $3,000 payment is for the advertisement in the next 3 months which is in December, January, and February.

In this case, we need to make the journal entry on November 20 for the $3,000 prepayment as the prepaid advertising expense by debiting $3,000 into the prepaid advertising expense and crediting the same amount into the cash account.

November 20:

Later, when we receive the advertising service by having our product displayed on the magazine page, we can make the journal entry to transfer the $3,000 prepaid amount into the advertising expense account with a $1,000 each month in the adjusting entry below:

December adjusting entry:

January adjusting entry:

February adjusting entry:

After these adjusting entries, the balance of prepaid advertising expense on the balance sheet will become zero as all the $3,000 of prepaid advertising expense has been transferred to the advertising expense on the income statement for the advertising service that we have received.