Does sales commission get reported in the income statement?
Sales commissions earned by a company would be reported as revenue in the company’s income statement. Sales commissions that a company must pay to others are reported as an expense.
Under the accrual basis of accounting (as opposed to the cash basis) commission revenues should be reported when the company earns the commissions. The commission expense should be reported when the company has incurred the expense and liability. (This would also be the time when the other party has earned the commissions and the right to receive them.)
The commission revenues would be reported as operating revenue (in the section where sales are reported), if the commissions are earned as a main activity of the company. If the commissions are incidental or involve a peripheral activity, these commission revenues would be reported as other income.
Commission expense would be reported as a selling expense along with other operating expenses when they are related to the company’s main activities. If a commission expense pertains to a peripheral activity, it would be reported as other expense.
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Hi,
I am really having problems figuring the treatment of sales commission. I am an auditor and in my last review of mobile company, i came to know that they had deferred sales commission and they expense it out in three months period. Thier rational is that the sales commission they are paying is attached to prepaid vouchers that they sell to distributors who in turn sell them to retailers or to the user. The user then activate that vouchers and use it in according to the number of minutes that voucher provides. The company sell the vouchers for 10% less that the selling price that distributors would sell it to the customers. The distributors basically is benefiting out of the price difference. As you may know, telecom companies recognize the revenue based on the minutes used. And if we take a voucher of $10 as example, they would not recognize the revenue at the time they sell that voucher to the distributor, instead they recognize it into three months at max.
Is deferring the commission on this scenario acceptable practice? If so, what does it meant to say that sales and administrative expense is a period expense expensed at the time they incurred. Further, it’s important to note the company has not done this during the previous three years. They introduce this new change in 2008 which, if become wrong practice would have overstated the revenue by $30 million.
I am looking for your help on this.
Best regards,