Capitalized commissions journal entry

Capitalized Commissions journal entry is to recognize an expense as asset considering the tenure of the benefits flowing from it.

Commissions is a percentage on the value of the original transaction. If the transaction pertains to the sale of goods, the commission is a percentage of the transaction’s revenue.

For instance, an insurance aggregator like Policy Bazaar earns a commission for each policy purchased through its website.

These commissions are income for the intermediaries and expenses for the entity that pays them against the sales made. They are part of the income statement line item for either of the two parties. Sometimes, these commissions will also support future sales.

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Example

For instance, Mr. Zero purchases an Online Udemy course based on an educational portal’s recommendation. So, Udemy pays an affiliate fee as a commission to the educational portal.

Mr. Zero gains subject knowledge from the course content and wants to improve his skills, so he is purchasing an annual membership for two years. Membership benefits include obtaining the different course prices at discounts.

In this example, the affiliate commission relating to the annual subscription doesn’t represents one time sales. It keeps on generating revenue throughout the two years. In other words, it’s appropriate to capitalize the commission and amortize it throughout the two-year period.

The above accounting approach is consistent with the matching concept, which explains that all expenses that generate revenue shall be recorded in the same period.

How to record the capitalized commissions journal entry?

We will first understand the initial entries.

A Fictitious asset is recorded in the commission’s name and amortized over the expected term of the benefits flowing from the customers.

How to identify the capitalized commissions journal entry?

These transactions pertain to specific business industries, like

• E-commerce products where the customer buys home appliances through a website and becomes a recurring consumer of other products
• Commission is paid in the first year of the insurance premium. However, the customer retains the policy and pays the commission till the end of the policy life unless there is a recurring commission agreement with the intermediary.

Frequently Asked Questions

Why to record the capitalized commissions journal entry?

A Capitalized Commission journal entry is recorded to ensure the respective expenses and incomes are together in the applicable period. It’s as per the matching principle.

For instance, think of a scenario where all the expenses are recorded in the year it is incurred.

It sounds like the expense side is inflating without recognizing equivalent value on the income side.

What’s the entry to record the amortization of commission worth $10,000 for the next three years?

Like any other entry, we can record this amortization entry by following golden accounting rules.

As per such rules, we will debit the expense and credit the asset because its value is reducing.

Can we use Accumulated Amortization GL account for Capitalized commissions entry?

Accumulated commission amortization is similar to accumulated depreciation. It’s a contra asset with a negative balance that offsets the capitalized commission.

The entries for the above example will be as follows.

Incurring the commission

Recording the Amortization

What are the best accounting practices while recording capitalized commissions?

1. Name the GL accounts to reflect the nature of the transaction.
2. Ensure you have an accumulated amortization account to track the commission expense charged to the Profit and loss statement.

Key Takeaways

Capitalized Commissions Journal entry records deferred expenditure as an asset. This accounting approach amortizes the cost incurred throughout the period of its benefits. It’s in line with the matching concept.

The journal entries are similar to recording a fixed asset and depreciation expense.