How sales commissions are reported in the income statement
/What are Sales Commissions?
A sales commission is the amount of compensation paid to a person based on the amount of sales generated. This is typically a percentage of sales, which is paid on top of a base salary. Sales commissions may also include a number of bonus features, such as payments made for sales generated in a new geographic region, or when sales exceed a certain threshold for a reporting quarter.
Accounting for Sales Commissions
Any commissions expense is recognized under the accrual basis of accounting as soon as the business has incurred the expense. However, under the cash basis of accounting, this expense is only recognized once the commission amount has been paid out to the recipient.
Presentation of Sales Commissions
Sales commissions paid out are classified as a selling expense, and so are reported on the income statement within the operating expenses section. This means that commissions are situated after the cost of goods sold. However, when the contribution margin income statement format is used, commissions are included in the cost of goods sold, because they are a variable expense.
Sales commissions may also be earned by a business, usually because it is selling goods or services on behalf of another company. In this case, commissions are reported within the revenue section at the top of the income statement. They are recognized as revenue under the accrual basis of accounting as soon as they have been earned. Or, they are recognized as revenue under the cash basis of accounting when the company receives payment for the amount due.