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. Here are the main types of sales commissions:
Straight commission. Salespeople earn a commission based solely on sales, without a base salary (e.g., 10% of each sale).
Base salary plus commission. A fixed salary is provided along with commissions on sales, offering financial stability while incentivizing performance.
Tiered commission. The commission rate increases as sales volume or revenue milestones are reached (e.g., 5% for sales up to $50,000, 7% for sales above $50,000).
Revenue-based commission. A percentage of total sales revenue is earned as commission, regardless of profit margins.
Profit-based commission. Commissions are calculated based on the profit margin of each sale rather than total revenue.
Residual commission. Salespeople earn ongoing commissions from repeat customers or subscription-based sales as long as the client remains active.
Draw against commission. Salespeople receive an advance (or "draw") on future commissions, which is later deducted from earned commissions.
Gross margin commission. Commission is based on the gross margin (revenue minus cost of goods sold) instead of total sales revenue.
Milestone-based commission. Commissions are awarded for reaching specific sales goals or performance benchmarks.
Hybrid commission. A combination of multiple commission structures, such as a mix of tiered, residual, and milestone-based commissions.
Each type of commission structure is designed to align sales incentives with business goals.
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.