Journal Entry for Commission Received

Commission is the amount that the company spends on someone to complete the sale of goods or services. Company pays the commission fee to the agency, other company or even their own staffs after they successfully make sale.

The company spends commission expenses to increase their sale and profit. It is the cost that is under the control of the company, as it only happens when sales happen. It is opposite from the sales team salary which is the fixed cost, it does not guarantee any sale volume.

Commission cost is the cost that company spends only on the sale made. It will be classified as variable cost and it is easy for them to control. The company usually sets a fixed amount or percentage to calculate the commission expense. They will always make a profit after commission payment.

On the other side, the entity that receives commission needs to record commission income. The company will receive a commission that is aligned with the sale made. The company that receives a commission is usually called the agency. They only receive when they are making sales for the customers.

The amount of commission received depends on the contract between the agency and the supplier of goods/services. The agency does not responsible for the design, production of the goods or services. They only promote and sell to the consumer, and charge based on the successful sale quantity.

Journal Entry for Commission Received

The company that provides selling service will record income after the receiving commission from the supplier of goods/service. The company needs to follow the matching principle which income and expense need to record based on the occurrence rather than a payment.

The agency needs to record commission income when they have to make a successful sale for the owner of the goods. They need to record revenue regardless of the payment. The journal entry is debiting commission receivable and credit commission income.

Commission receivable is represented as accounts receivable on the balance sheet, they need to collect cash from the seller of goods. Commission income will present as revenue on the income statement.

When the owner makes payment to the agency regarding the successful sale of goods or services, the agency needs to reverse the commission receivable and record cash. The journal entry is debiting cash and credit commission receivable.

The transaction will increase cash balance on the balance sheet. And it also reverses the commission receivable from the balance sheet.

Note: some companies may record cash and commission income without going through commission receivable. It is not a problem when the owner pay on a regular basis and it will not impact the cut-off.

Journal Entry for Commission Received Example

Company ABC is the agency that sells the goods on behalf of Company XYZ. ABC will receive $ 100 after making sale of a unit of goods for XYZ. During the month, there are two transactions as follows:

• On 01 December, ABC has sold 50 units of XYZ products. XYZ promises to make payment in the next 15 days.
• On 15 December, XYZ make a payment of $ 5,000 for the sale on 01 December.
• On 20 December, ABC receive a commission of $ 2,000 for selling 20 units of goods. Due to some reasons, ABC has not yet recorded commission income.

Please prepare the journal entry for both transactions.

On 01 December, ABC needs to record commission income even they have not yet received any payment. The journal entry is debiting commission receivable $ 5,000 (50 units * $ 100 per unit) and credit commission income $ 5,000.

The transaction will increase commission receivable on balance sheet by $ 5,000. It also records commission income on the income statement.

On 15 December, Company receive the commission from XYZ, so the needs to record cash of $ 5,000 and credit commission receivable $ 5,000.

The transaction will decrease commission receivable by $ 5,000 and increase cash by $ 5,000.

On 20 December, company receives a cash commission of $ 2,000 from XYZ, but ABC has not yet recorded any income. So ABC should record cash $ 2,000 and commission income $ 2,000. It is not necessary to record receivables as the cash already receipt.

This kind of transaction happens when the company did not make any record regarding the accounts receivable. They may not have enough information to record the entry.