Companies Change Advertising Treatment

The method of accounting for advertising costs affects sales and marketing executives. In the past, companies sometimes recorded as assets the costs of media advertising for burgers, bleaches, athletic shoes, and other products. They then expensed those costs in subsequent periods as sales took place. The reasoning behind this treatment was that long ad campaigns provided benefits over multiple accounting periods. Today the accounting profession no longer allows this treatment because it decided that the benefits were too difficult to measure.

Instead, companies now must expense advertising costs when the advertising takes place. The issue is important because the outplays for advertising can be substantial. Recent big spenders: The Coca-Cola Company spent $2.2 billion, PepsiCo., Inc. $1.7 billion, Nike, Inc. $1,378 million, and Limited Brands $484 million.

Why might the new accounting method cuse companies sometimes to spend less on advertising?

Insurance. Companies purchase insurance to protect themselves from losses due to fire, theft, and other unforeseen events. Insurance must be paid in advance. Insurance premiums (payments) normally are recorded as an increase (a debit) to the asset account Prepaid Insurance. At the financial statement date companies in crease (debit) Insurance Expense and decrease (credit) Prepaid Insurance for the cost that has expired during the period.

On October 4, Pioneer Advertising Agency paid $600 for a one -year fire insurance policy. Coverage began on October 1. Pioneer recorded the payment by increasing (debiting) Prepaid  Insurance. This account shows a balance of $600 in the October 31 trial balance. Insurance of $50 ($600 ÷ 12) expires each month. Thus, Pioneer makes the following adjusting entry.