Definition of Sales Commissions
Sales commissions are amounts earned by selling another company's goods or services and paid by the company whose goods or services were sold. The amounts earned/paid are often based on dollars of sales or number of units sold.
The company responsible for paying the sales commissions will report a selling expense. It will also report a liability for any unpaid commissions. The company or person that did the selling will report revenues or income for the amount earned. It will also report a receivable for any commissions earned but not yet received.
Examples of Sales Commission
Under the accrual basis of accounting (as opposed to the cash basis) the parties involved should record the sales commissions as follows:
- The company responsible for paying the sales commission should debit Sales Commission Expense and credit a liability account in the accounting period when the sales occur. When the commission payment is made, the liability account is debited and the Cash account is credited. If the sales are related to the company's main activities, the commissions are reported on the company's income statement as commission expense, or as part of the companies selling, general and administrative (SG&A) expenses. (Any commission expense that pertains to a peripheral activity of the company should be reported as other expense.)
- The company receiving the commission should credit Commission Revenues and debit Commissions Receivable provided there is certainty that the commissions will be collected. The amount of Commission Revenues will be reported on the income statement as one of the company's operating revenues. (If the commissions were not a main activity of the business, the commissions earned will be reported as part of other income.)