Introduction:
TechCo, a company that manufactures electronic gadgets, decided to launch a new marketing campaign to promote their latest smartwatch. They hired a marketing agency to create and distribute advertisements.
The Situation:
The total cost for the marketing campaign was $10,000. To secure the agency’s services, TechCo paid $2,000 upfront. The remaining $8,000 was agreed to be paid later, using trade credit, meaning TechCo would have some time before needing to pay the rest.
Case Facts:
Total cost of the marketing campaign: $10,000
Amount paid upfront (in advance): $2,000
Amount financed through trade credit: $8,000
Question for You:
Now, let’s think about how TechCo would record this transaction in their accounting books according to IFRS (International Financial Reporting Standards). TechCo needs to make the following journal entries:
When the upfront payment is made:
Debit: Prepaid Expense for the amount paid upfront.
Credit: Cash/Bank for the amount paid.
When the marketing service is received:
Debit: Marketing Expense for the total cost of the service.
Credit: Prepaid Expense for the amount already paid upfront.
Credit: Accounts Payable for the amount financed through trade credit.
When TechCo pays the remaining balance:
Debit: Accounts Payable for the amount owed.
Credit: Cash/Bank for the amount paid.
Can You Figure Out the IFRS Journal Entries?
Based on the information provided:
When TechCo makes the upfront payment:
Debit: Prepaid Expense for $2,000
Credit: Cash/Bank for $2,000
When the marketing service is received:
Debit: Marketing Expense for $10,000
Credit: Prepaid Expense for $2,000
Credit: Accounts Payable for $8,000
When TechCo pays the remaining balance:
Debit: Accounts Payable for $8,000
Credit: Cash/Bank for $8,000
This case study illustrates how businesses record their marketing expenses by combining upfront payments and financing through trade credit, allowing them to spread out payments while ensuring their campaigns are launched effectively.
Disclaimer: This case study is designed to enhance digital financial literacy and business management skills among students, to help them apply these concepts in real-world scenarios to boost their earnings, employability and entrepreneurial potential. The case was edited by Razi Amin, a Harvard MBA with 30+ years of leadership and advisory experiences at major international banks in New York, London, Hong Kong and Washington, DC. Razi is also a member of Harvard Alumni for Global Women's Empowerment. While AI technology was used for prompt-engineering to generate case content, every case has been rigorously reviewed and edited to ensure accuracy, clarity, and educational effectiveness. Reproduction of this case material is prohibited without permission from ASPEN Capital Solutions LLC.
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