![]() Example of the Accounting for Commissionsįred Smith sells a $1,000 widget for ABC International. It is also acceptable to classify it as part of the expenses of the sales department. You can classify the commission expense as part of the cost of goods sold, since it directly relates to the sale of goods or services. If the person receiving the commission is not an employee, then that person considers the commission to be revenue, and may pay taxes if there is a resulting profit. If an employee is receiving a commission, then the company withholds income taxes on the amount of the commission paid to the employee. Under the cash basis of accounting, you should record a commission when it is paid, so there is a credit to the cash account and a debit to the commission expense account. This is a debit to the commission expense account and a credit to a commission liability account (which is usually classified as a short-term liability, except for cases where you expect to pay the commission in more than one year). Under the accrual basis of accounting, you should record an expense and an offsetting liability for a commission in the same period as you record the sale generated by the salesperson, and when you can calculate the amount of the commission. A commission may be earned by an employee or an outside salesperson or entity. Less-common commission structures are based on the gross margin or net income generated by a sale these structures are typically less used, since they are more difficult to calculate. The commission may be based on a flat fee arrangement, or (more commonly) as a percentage of the revenue generated. In the inventory ledger record the payment as a credit to accrue inventory, and lower the balance by the price amount, while in the inventory payable ledger record the accrue inventory as a debit then lower the balance by the price amount.A commission is a fee that a business pays to a salesperson in exchange for his or her services in either facilitating, supervising, or completing a sale. In the general journal, record the payment as a debit to inventory payable in the price amount, and as a credit to cash. Make adjusting entries on all areas when you pay for the inventory. Add the amount to any existing balance in the account and list in the “Balance” section on the same line. ![]() Record an entry in the inventory payable ledger beginning with the date, then the words “Accrue Inventory” in the explanation section, and the inventory amount in the “Credit” section. Add the inventory price to any previous balance in the account listed in the journal and then place the modified amount in the “Balance” section of the line. Record an entry in the inventory ledger with the date placed on the next available line, followed by writing “Accrue Inventory” in the explanation section of the journal, then the inventory expense in the “Debit” section. Write “Accrue Inventory” in the Account title section on the next line of the journal, to let the reviewer know that this was an inventory purchase recorded using the accrual method. Place the cost of the inventory purchase in the “Credit” column. Indent slightly in the “Account Title” column and then write “Inventory Payable” to show that while purchased, the inventory wasn’t paid for on the purchase date. Move down a line to continue the inventory purchase entry in the general journal.
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