When it comes to accounting for advertising expenses, the answer is not always clear-cut. Depending on the type and price of the advertising, it can be classified as either a capital or income expenditure. Direct response advertising that meets certain criteria must be capitalized, while income expenses are short-term business expenses that are usually used immediately or within a year. Tracking revenue expenses allows a company to link income earned to business operations expenses incurred during the same accounting year. Advertising costs are a type of financial accounting that covers expenses associated with promoting an industry, entity, brand, product, or service.
In most cases, these costs will be included in sales, general and administrative expenses (SG&A) in a company's income statement. However, while advertising really has merit and value, from an accounting standpoint, it is generally treated as an expense. In a recent decision, the income tax tribunal held that advertising expenses were a “capital expense, as it brought a lasting benefit to the Company. Many small business owners report that they spend as little as 1% of their annual business revenue on advertising. The relationship between advertising and sales (or A to S), for example, simply looks at advertising costs divided by overall sales over a given period. Advertising is a way to increase a company's sales through brand or product awareness and inform about new products or features.
Because accountants cannot measure the future benefit of advertising, advertising costs must be reported as Advertising Expenses at the time the ads are served. You must be able to document customer responses by specifying the customer's name and advertising that generated the response (such as an encrypted order form or reply card). Then, as those sales occur, those advertising expenses move from the balance sheet (prepaid expenses) to the income statement (SG&A).Advertising is any communication with a target audience designed to persuade that audience to take some kind of action, such as buying a product or service. Ultimately, whether an advertising expense is classified as capital or income depends on its purpose and cost.