Elon Musk and Accounting for Advertising Expenses

Photo by Souvik Banerjee on Unsplash

There are some aspects of advertising that Elon Musk doesn’t like.

“I’ve had an aversion to advertising because there’s…just too much trickery,” Musk said at a Tesla shareholder meeting in 2019. “They’ll have a bad product and then put it in a nice environment with good-looking people and then, like, trick you into buying it.” 

A lengthy Wall Street Journal article explains that: “Musk has long harbored a disdain for the hard sell, preferring that products sell themselves.” As a result, his businesses have long prioritized engineering (building a better product) over marketing and sales.

Which brings us to Twitter.

Musk also owns a business that drives nearly all of its revenue from advertising. The New York Times recently reported that advertising makes up 90% of Twitter revenue.

With Telsa and SpaceX, Musk might be an advertising buyer- but he’s an ad seller at Twitter.

So, how do ad buyers account for advertising expenses?

Start with the matching principle.

The Matching Principle

This accounting principle states that revenue is recorded when earned, and expenses are posted when incurred to generate revenue.

Here’s an example.

You owe employees $5,000 in payroll for the last few days of May, but you don’t pay payroll again until June 3^rd. On May 30^th, you record $5,000 in payroll expenses, and $5,000 wages payable.

Why?

Because the payroll expense was incurred in May- it was incurred to generate more revenue in May.

When you pay payroll on June 3^rd, you decrease wages payable balance and reduce cash.

Makes sense.

What if you pay $150,000 to run a Doritos TV commercial on an NFL game in mid-October? You’ve spent the money in October, but how do you match the expense with revenue (chip sales) from the TV commercial?

You can’t.

So you apply the principle of conservatism.

Understanding the Principle of Conservatism

This principle says that, when in doubt, record an expense sooner rather than later. Accountants should also delay recognizing revenue until there’s good evidence that revenue was earned. Expenses, on the other hand, should be posted sooner, if there’s no evidence that ties the expense to specific revenue.

The result?

Net income is more realistic. The income statement leans toward less revenue and more expenses.

Since you can’t connect the TV commercial to a specific amount of Doritos sales, you expense the advertising dollars in the period that you spent the money- in October.

Food for thought.