What Are Advertising Costs?

Advertising costs are a type of 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, and administrative (SG&A) expenses on a company's income statement.

Most business owners budget for a certain amount of advertising costs, which
the U.S. Small Business Administration says should amount to 7%–8% of total
annual revenues.
Understanding 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.

KEY TAKEAWAYS

 Advertising costs are a category in financial accounting associated with

promoting an industry, entity, brand, product, or service.
 Advertising costs are sometimes recorded as a prepaid expense on the
balance sheet and then moved to the income statement when sales relate
to those costs come in.
Special Considerations
Advertising costs are typically not a surprise to a business owner. In fact, many
will have budgeted for a certain amount of advertising costs. The U.S. Small
Business Administration recommends that businesses that make less than $5
million per year spend at least 7%–8% on advertising.

However, many business owners feel this is too much. Consequently, many
small business owners report spending as little as 1% of their annual business
income on annualizing. If you single out manufacturers and wholesalers
specifically, the number is closer to around 0.7% of annual revenues spent on
advertising.

Simply spending the money is no guarantee, of course, that a business will get
the return on investment they want with their ad expenditures. As such, business
owners need to make sure they're spending their advertising budget in the right
places, where the audience is likely to include potential buyers of their product or
service. Some media outlets offer a 40%–50% discount for running ads in slots
left open due to cancellations.

Whatever a business spends on advertising, the point is to maximize the ROI of

advertising costs. This can be difficult because there is no shortage of advertising
opportunities out there to consider. The best bet is to settle on a set of business
goals and build a program around those.