Is Advertising an Asset or an Expense?

Is Advertising Expense an Asset?

Advertising is a crucial business activity that makes potential customers aware of a company’s products or services. It includes television, the internet, print publications, fliers, billboards and many other marketing techniques.

Expenses for advertising are part of the selling, general and administrative expenses in the income statement. However, some of these costs may generate future benefits and should be capitalized.

What is an Asset?

An asset is anything that has monetary value and could provide financial benefit to a business or individual. It includes most of the things that a company controls and owns, such as cash, accounts receivable, inventory, and other assets that can be converted to cash or sold for a profit.

A business's total assets, which are listed on its balance sheet, are important to a company's health and solvency. They can include cash, inventory, equipment, plants, patents, and copyrights.

Operating assets are those that are used to generate revenue. They may include cash, inventories, manufacturing plant equipment, and copyrights on designs or patents on specialized features of a product.

Non-operating assets are those that a company does not use day to day, but still generates revenue (investments, interest income from a fixed deposit account, vacant land).

Asset classification is critical for a company's success because it helps leaders understand key financial metrics such as working capital and cash flow. It also helps banks determine the risks they take on when lending money to a business.

What is an Expense?

Advertising expenses are the costs incurred by a business in promoting its products or services. This includes advertising in print media and online venues, broadcast time on radio and TV, as well as direct mail.

These costs are usually reported as sales, general and administrative (SG&A) expenses on a company’s income statement. However, they may be recorded on the balance sheet as a prepaid expense if a company has reason to believe that certain future sales will be directly related to these advertising costs.

A company that pays for advertisements in advance will record the amount as a prepaid expense on its balance sheet until it receives these advertising services, at which time the unused part of the advanced payment is transferred to an account called Prepaid Advertising.

The adjusting entries for this account are typically made at the end of each accounting period to update the company’s accounts. However, monthly adjusting entries are also necessary for some companies to ensure that the company’s financial statements are accurate and up-to-date.

What is a Depreciable Asset?

A depreciable asset is an income-producing property, like machinery, vehicles, or office buildings, that typically loses value over time. Such assets can be categorized as tangible or intangible - such as computers, patents, copyrights and trademarks.

A business depreciates these assets by calculating their cost over a period of years. This allows the company to write off a smaller amount of the costs over the lifetime of the asset rather than one large deduction at the time of purchase.

This can help companies keep their tax bills down and make sure they receive the total tax deduction available to them.

In order for an asset to be depreciable, it must meet a few key criteria. It must be business-owned, have a definite useful life and be expected to last more than one year.

What is a Non-Depreciable Asset?

A non-depreciable asset is a fixed asset that is not eligible for depreciation. This includes things like land or a portable piece of equipment.

To qualify as a non-depreciable asset, the property must be yours (or you make capital improvements towards it), used for a business or income-generating activity, and have a determinable useful life greater than one year.

Depending on how the asset is used, it may depreciate or lose value gradually over time. The rate of depreciation depends on the asset’s use, condition, and age.

Organizations utilize depreciation to allocate the cost of long-term assets, such as equipment and buildings, over their useful life. This allows businesses to better match their revenue with their expenses.

Patti Goldenman
Patti Goldenman

General bacon lover. Hipster-friendly travel guru. Proud bacon ninja. Incurable zombie trailblazer. Professional bacon fanatic.

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