The accrual accounting method requires businesses to report expenses when they are accrued. In many cases, an accrued expense is recorded when a business is invoiced for it. However, in many instances a company using the accrual method of accounting pays for some expenses, such as advertising, in advance – before the business actually has a use for the item. This is called a prepayment. Prepayments are accounted for differently than other expenses. Rather than record the entire amount paid in advance right away, the business must allocate the expense equally among the periods in which a benefit is received for the services purchased.

Step 1

Calculate your total prepaid advertising expense. In general, this is the cash amount you pay to the advertiser when you purchase the ad.

Step 2

Calculate the number of months of advertising your business receives for the amount you paid. If your cost covers only one month of advertising, your expense equals the amount you paid. Record the amount your paid as an expense by debiting your advertising expense account and crediting the amount of cash you paid to the advertiser.

Step 3

Divide the amount you paid by the number of months covered. The result is your monthly advertising expense. When you make adjusting entries to close out your monthly profit and loss statement, debit your “Advertising Expense” account and credit your “Prepaid Advertising” asset account. This adds the accrued expense to your profit and loss statement and reduces the prepayment amount in your asset account.