What is a Sales Commission?

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. A high proportion of sales commission to base pay is intended to draw the attention of the sales staff most forcefully to the need to generate sales.

How to Report Sales Commissions as an Expense

Sales commissions are a key component of a company’s selling expense, and so are normally considered part of operating activities. Usually, they are listed within the selling, general, and administrative expenses section of the income statement. However, if a contribution margin income statement is being used (where all variable expenses are listed first), then sales commissions are listed with the variable expenses; this means that commissions are really part of the cost of goods sold.

Under the accrual basis of accounting, sales commissions should be recorded as soon as they have been earned by the salesperson, irrespective of when the commission is actually paid. Conversely, under the cash basis of accounting, sales commissions are only recorded when the related cash has been paid to the salesperson.

How to Report Sales Commissions as Revenue

In cases where a company earns a sales commission, it is reported as revenue in the income statement. It is normally classified as operating revenue if the commission earned is part of the core operations of the business. Otherwise, it is classified as other income. Under the accrual basis of accounting, sales commissions payable to the business by a third party are recorded as revenue as soon as they are earned, no matter when the related cash payment is made to the firm. Conversely, under the cash basis of accounting, inbound sales commission payments are only recorded as revenue when the related cash payments have been received.