Small companies often grow on word of mouth, but to get the word of mouth going, you need to spend money to advertise your company. The advertising expense account is standard in the chart of accounts of any business because almost all businesses need to advertise. If you use financial software, it is likely already in your chart of accounts.
Advertising is any communication from your business to a wider audience designed to persuade the audience to by your services or products. Advertisements come in many forms, including Web page banners, direct mail, billboards, TV and radio commercials, flyers, newspaper ads, magazine ads and charitable event sponsorships.
Small business owners are sometimes confused about whether large advertising projects are an asset or an expense. Buying advertisements, like buying equipment, is an investment in your business. This makes some owners want to treat advertising like a capital expenditure and record it as an asset, which is what you would do with equipment. But because the benefits advertising brings to your company are often not quantifiable, it is an expense, not an asset.
Advertising is a tax deductible expense. When you receive a bill for advertising, debit your advertising expense and credit your accounts payable account. When you pay the bill, you would reverse the entry and debit accounts payable and credit cash. If you pay for the advertising directly with cash, debit advertising expense and credit cash.
You increase the advertising expense account with a debit. The only reasons to credit the advertising expense account are to record an adjusting entry to correct a bookkeeping error or if a company you paid for advertising gives you a refund. To record the refund, debit the cash account and credit the advertising expense account.