Sales representatives may be paid based on a commission structure.
Commission expense is an income statement account generated on an accrual basis. Shows how much you were scheduled to pay in commissions during the same period that the related revenue was earned. This type of expense is accounted for in the same period as a fee liability.
There are several acceptable ways to classify a commission expense. Since it is a maintenance cost of the sales department, it can be categorized as a selling expense. It can also be classified as cost of goods sold, since it is one of the expenses related to offering the service or product for sale.
The use of this type of expense classification depends on who receives the payment. If a seller earns the commission, it is an expense. In case the company receives the commission, it is an income. When a company receives a commission, it can choose to absorb it into accounts receivable. In this case, it can still be classified as a commission expense.
A commission expense will be recorded for the period of time the commission was earned, even if it was not paid in that period. This often happens when commission payments are made on a specific day of the month, rather than directly after the sale. If the commission is not paid, it should also be recorded as commissions payable. You should also categorize an unpaid commission as an accounts payable item, as this category can include amounts owed to employees, vendors, and contractors.
The process of recording a typical commission expense, where a seller receives commissions at specific intervals, such as monthly or quarterly, is as follows. A seller makes a sale, which generates income. The commission is calculated on this income.
The amount is then recorded as a debit against commission expenses and a credit against commissions payable. In the next period, when the seller is due to be paid, commissions payable are changed to a debit and the commission expense is converted to a credit. The actual payment is then recorded as a debit for commission expense and a credit for cash.
Commission expenses can come from a variety of payment types. Most commissions are based on a percentage of earned revenue. Another common method is to pay the seller a flat fee. More unusual payment arrangements include commission determination based on the net income or gross margin associated with a specific sale.