Commission Expense

Commission expense is recognized in the company's financial statements in the period when the related sales transaction occurs, aligning with the principle of matching expenses with revenues. Properly accounting for commission expense is crucial for accurately assessing the company's profitability and financial performance.

What are commissions, cogs or expense?

Commissions are typically classified as an expense rather than part of the cost of goods sold (COGS). Here's a breakdown of the distinctions:

Commissions: Commissions are payments made to salespersons or agents as compensation for generating sales or securing deals. They are considered operating expenses because they are directly tied to the sales process and are incurred to incentivize sales efforts. Commissions are recognized on the income statement in the period when the related sales transactions occur. They are separate from the cost of goods sold (COGS) because they are not directly related to the production or acquisition of goods or services.
Cost of goods sold (COGS): COGS refers to the direct costs incurred by a company in producing goods or services that have been sold during a specific accounting period. These costs typically include expenses such as raw materials, labor, and manufacturing overhead directly attributable to the production process. COGS is deducted from the company's revenue to calculate its gross profit. Unlike commissions, COGS is directly related to the production or acquisition of goods and is not considered an operating expense.‍
Operating expenses: Operating expenses encompass all expenses incurred in the normal course of business operations, excluding COGS. This category includes expenses such as salaries, rent, utilities, marketing, and sales commissions. Operating expenses are deducted from gross profit to calculate operating income. Commissions are classified as operating expenses because they are incurred to support sales activities and are essential for generating revenue.

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What type of expense is sales commission?

Sales commission is typically categorized as a variable selling expense. Here's why:

Variable nature: Sales commissions vary directly with the level of sales or revenue generated by the salesperson or agent. As sales increase, commission expenses increase proportionally, reflecting the performance-based nature of these expenses.
Directly tied to revenue generation: Sales commissions are incurred as a result of sales activities and are directly tied to the company's revenue generation efforts. They serve as an incentive for salespersons to achieve sales targets and contribute to the company's top-line growth.‍
Variable selling expenses: Variable selling expenses are costs that fluctuate with changes in sales volume or revenue. Sales commissions fit this definition perfectly, as they increase or decrease based on the level of sales achieved by the sales team.

Why does a company charge its sales commission costs to expense?

Many companies across various industries charge their sales commission costs to expense. This practice is common among businesses where sales activities are central to revenue generation. Examples of companies that typically charge sales commission costs to expense include:

Retailers: Companies in the retail sector often pay sales commissions to employees who generate sales, such as sales associates or account managers.
Real estate agencies: Real estate brokerages frequently pay commissions to real estate agents for facilitating property sales or leases.
Insurance companies: Insurance firms may compensate agents or brokers with commissions for selling insurance policies or financial products.
Technology companies: Software companies and tech startups often employ sales representatives who earn commissions based on the sales of software licenses, subscriptions, or services.
Financial services firms: Banks, investment firms, and financial advisors may pay commissions to sales professionals for selling financial products such as mutual funds, securities, or insurance policies.
Manufacturing companies: Some manufacturing companies utilize sales agents or representatives who earn commissions for securing orders or selling products to distributors or end customers.‍
Travel agencies: Travel agencies often pay commissions to travel agents for booking flights, accommodations, and other travel-related services on behalf of clients.

How to account for commission expense?

Accounting for commission expenses involves several steps to ensure accurate recording and reporting in the company's financial statements. Here's a general overview of the accounting process for commission expenses:

Recognition of commission expense: When a sales transaction occurs, and a commission becomes payable to a salesperson or agent, the company recognizes the commission expense in the period in which the sale is made. This ensures that expenses are matched with the related revenue, adhering to the matching principle of accounting.
Calculation of commission expense: The amount of commission expense is typically determined based on a predetermined commission rate applied to the sales revenue generated by the salesperson or agent. The commission rate may be a fixed percentage of sales, a tiered structure based on sales targets, or a combination of factors determined by the company's compensation plan.
Recording commission expense: To record the commission expense, the company debits the Commission Expense account and credits a liability account such as Commission Payable or Accrued Commissions. This entry reflects the recognition of the expense and the corresponding obligation to pay commissions to the salesperson or agent.
Adjustment and reconciliation: At the end of the accounting period, the company may need to adjust the commission expense account to reflect any changes or corrections. This adjustment ensures that the commission expenses are accurately reported in the financial statements. Additionally, the Commission Payable account is reconciled to verify the accuracy of the amounts owed to salespersons or agents.
Payment of commissions: When commissions are paid to salespersons or agents, the company debits the Commission Payable account and credits the Cash account (or Bank account if paid by check or electronic transfer). This entry reflects the reduction of the liability for commissions payable and the outflow of cash.‍
Reporting in financial statements: Commission expenses are reported on the income statement as part of operating expenses. They are typically included in the "Selling, General, and Administrative Expenses" (SG&A) section. The commission expense amount is deducted from total revenue to calculate the company's gross profit.

How to record commission expense?

Recording commission expenses involves creating journal entries to reflect the recognition of the expense and the corresponding liability for commissions payable. Here's a step-by-step guide on how to record commission expenses:

1. Determine the Commission Amount:
Calculate the commission amount payable to the salesperson or agent based on the agreed-upon commission rate and the sales generated.

2. Create a Journal Entry:
To record the commission expense, create a journal entry with the following accounts:some text

Debit commission expense: Increase the Commission Expense account to reflect the recognition of the expense. This account is typically classified as an operating expense on the income statement.
Credit commissions payable: Increase the Commissions Payable liability account to recognize the obligation to pay commissions to the salesperson or agent. This account represents the amount owed for commissions that have been earned but not yet paid.

How to record commission expense in quickbooks?

To record commission expenses in QuickBooks, you'll typically use the "Expense" or "Check" feature depending on whether the commission has already been paid or if it's accrued. Here's how to record commission expenses in QuickBooks:

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1. Recording paid commission expense (Using expense tab): If you've already paid the commission, follow these steps:

Navigate to the "+ New" button at the top left corner of your QuickBooks dashboard.
Choose "Expense" under the "Vendors" section.
Fill out the necessary fields:
1. Payee: Select the vendor or individual who received the commission.
2. Payment Date: Enter the date the commission was paid.
3. Account: Choose the appropriate expense account (e.g., "Sales Commissions Expense").
4. Amount: Enter the total amount of the commission.
5. Payment Method: Select the method used to pay the commission (e.g., Cash, Check, Credit Card).

Click "Save and close" to record the transaction.

2. Recording accrued commission expense (Using check tab): If the commission expense is accrued (i.e., it hasn't been paid yet but is owed), follow these steps:

Navigate to the "+ New" button at the top left corner of your QuickBooks dashboard.
Choose "Check" under the "Vendors" section.
Fill out the necessary fields:
1. Payee: Select the vendor or individual who earned the commission.
2. Check Date: Enter the date the commission was earned or accrued.
3. Account: Choose the appropriate expense account (e.g., "Sales Commissions Expense").
4. Amount: Enter the total amount of the commission.
5. Click "Save and close" to record the transaction.

3. Reviewing and reconciling:
After recording the commission expense, review your transaction history and ensure that it's accurately reflected in your financial reports. You may also want to reconcile your accounts regularly to verify that your records match your bank statements.

Employee pulse surveys:

These are short surveys that can be sent frequently to check what your employees think about an issue quickly. The survey comprises fewer questions (not more than 10) to get the information quickly. These can be administered at regular intervals (monthly/weekly/quarterly).

One-on-one meetings:

Having periodic, hour-long meetings for an informal chat with every team member is an excellent way to get a true sense of what’s happening with them. Since it is a safe and private conversation, it helps you get better details about an issue.

eNPS:

eNPS (employee Net Promoter score) is one of the simplest yet effective ways to assess your employee's opinion of your company. It includes one intriguing question that gauges loyalty. An example of eNPS questions include: How likely are you to recommend our company to others? Employees respond to the eNPS survey on a scale of 1-10, where 10 denotes they are ‘highly likely’ to recommend the company and 1 signifies they are ‘highly unlikely’ to recommend it.

Based on the responses, employees can be placed in three different categories:

Promoters
Employees who have responded positively or agreed.
Detractors
Employees who have reacted negatively or disagreed.
Passives
Employees who have stayed neutral with their responses.

Is sales commission a selling or administrative expense?

Sales commission is typically classified as a selling expense rather than an administrative expense. Selling expenses are directly related to the sales function of a business and include costs incurred to generate sales revenue. Since sales commissions are directly tied to the sales process and are incurred as a result of sales activities, they are considered part of selling expenses.

Administrative expenses, on the other hand, encompass general overhead costs associated with running the administrative functions of a business. These expenses are not directly tied to the sales function but rather to the overall management and administration of the company, such as salaries for administrative staff, office supplies, utilities, and rent for administrative facilities.

Is the commission received an expense or income?

The commission received by a company can be considered as income or revenue rather than an expense. Here's why:

Commission income: If a company earns commission by acting as an intermediary or agent in facilitating transactions for others, the commission received is considered income or revenue. This income contributes to the company's total revenue and is recorded on the income statement, increasing the company's profitability and net income.
Not an expense: Since the commission received represents income earned by the company, it is not classified as an expense. Instead, it is recognized as revenue, reflecting the value generated by the company's services in facilitating transactions.

Are commissions considered to be revenues or expenses?

Commissions can be considered both revenues and expenses, depending on the perspective:

Commission expense: When a company pays commissions to salespersons, agents, or intermediaries for their services in generating sales or facilitating transactions, commissions are considered expenses. These expenses are recorded on the company's income statement under operating expenses, typically categorized as selling expenses. Commission expenses reduce the company's profitability and net income.
Commission revenue: Conversely, when a company earns commissions for acting as an intermediary or agent in facilitating transactions for third parties, commissions are considered revenue. Commission revenue is recorded on the income statement as part of total revenue, contributing to the company's top-line growth and increasing net income.

Commission Expense

What are commissions, cogs or expense?

What type of expense is sales commission?

Why does a company charge its sales commission costs to expense?

How to account for commission expense?

How to record commission expense?

How to record commission expense in quickbooks?

Employee pulse surveys:

One-on-one meetings:

eNPS:

Based on the responses, employees can be placed in three different categories:

Is sales commission a selling or administrative expense?

Is the commission received an expense or income?

Are commissions considered to be revenues or expenses?

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