Sales commission definition
/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. A sales commission may be paid when a sale is generated, or when cash is received from the customer. The latter payment system is the wiser course of action, since it forces salespeople to pay attention to the creditworthiness of customers.
How to Calculate Sales Commission
Several different incentives can go into the calculation of a sales commission. For example, the sales manager might require that a basic sales threshold be surpassed before any commission percentage is applied. On top of this commission may be layered a bonus for selling certain products or services (perhaps because they are unusually high margin), and another bonus for selling into a specific sales region or to certain customers. Commissions may also be split when more than one person is involved in a sale.
Accounting for Sales Commissions
Sales commissions are normally included directly into the periodic payroll calculations, so they are accounted for within the periodic payroll journal entry. If a business is using the accrual basis of accounting, it might also record a sales commission accrual if there are any commissions at the end of a reporting period that have been earned but not yet paid. This is recorded as a debit to the commissions expense account and a credit to the accruals liability account. This entry is set up as a reversing entry, so it is automatically reversed by the accounting software at the beginning of the next reporting period.