The Commission Receivable Journal Entry is to record the accrued Commission.
What does commission mean?
A commission is the payment made for completing a task.
For instance, marketing professionals are paid a commission based on the sales value.
What’s the purpose of employing the commission approach?
The commission-based strategy is justified by the need to boost sales.
Commission-based remuneration for sales agents will be directly correlated with their efforts.
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Commission Receivable Journal Entry Example:
Quiet Company is a dealer that sells Noisy Company’s air conditioners. Quiet Company is an agent of Noisy Company. The Commission rates are 5% on the value of goods sold and are paid once every three months (quarterly).
The Quiet company’s current month sales are 100 ACs with a total value of $50,00,000. Commission receivable is 5% of that amount, which equals $2,50,000.
So, Quiet Company accrues the Commission receivable for the current month by debiting the receivable and crediting the income account for $2,50,000.
Commission receivables are income general ledger items. The entity needs to check the certainty of receiving the Commission before recognizing it in the books of accounts.
Have you heard the term revenue recognition criteria?
Transaction accounting requires adhering to specific rules, frameworks, and standards set up by the governing bodies. Therefore, the bookkeeping team shall follow their respective GAAP.
We have tried to add a couple of conditions below that need to be satisfied for revenue recognition.
- Transfer of ownership (Risks and Rewards) to the buyer
- Certainty in the collection of receivables
- Measurability of sales amount
Note: The above conditions are not exhaustive. It’s always best to check for the applicable GAAP and follow those appropriately.
How do you record the Commission Receivable Journal Entry?
1. Commission Accrual Journal entry
Commission Accrual is also called a commission receivable account. Let’s understand the nature of the GL accounts that are part of the transaction. The commission income Account is a nominal account, and the Commission Receivable Account is a real account.
The next step is identifying the applicable accounting rules to record the journal entries. Rules are below:
- Real Accounts – Debit What Comes in and Credit What Goes Out
- Nominal Account – Debit all Expenses and Losses and Credit all Incomes and Gains
Recording the Commission accrual Entry:
2. Commission Receipt Journal Entry
Commission receipt JE here is to record the proceeds received in the bank. Therefore, the GLs are Bank A/c (Real Account) and Commission Receivable A/c (Real Account). So, the Real Accounts – golden rules of accounting are applicable here.
Real Accounts – Debit What Comes in and Credit What Goes Out
Resources: Read this article better to understand the debits and credits in the Journal entries.
Frequently Asked Questions:
Is commission receivable a debit or a credit?
Commission receivable is an asset. So, we will debit the Commission receivable account to increase the asset balance and credit the commission income account correspondingly.
Per the Golden accounting rules, we must debit what comes in and credit what goes out. The commission will be receivable. Therefore, debiting the Commission receivable is appropriate.
Is Commission receivable an income or an asset?
Commission receivable is an Asset GL, as there will be an inflow of funds. This Commission receivable GL is a parking account for a bank account. The bank account is hit when funds are received or paid.
Per the terms and conditions of the commission contract, there might be a delay in receiving funds owing to the due date falling later. Even though this transaction does not involve cash receipts now, we need to ensure that accounting is done for it. We can count this as similar to a credit sale.
Is Commission receivable an expense?
No. Commission receivable is an asset account. As the Cash will flow into the business, it’s not an expenditure.
Also Read: Rent Paid Journal Entry
How do you record brokerage fees in accounting?
Brokerage fees can be income or expenses, depending on the nature of the transactions. Let’s take a classic example relating to stock purchases. Mr. Lazy opens a Demat account with the loss-holder stock broking company. Mr. Lazy buys ten shares of ABC Company by paying 0.5% brokerage to the Loss-Holder share broker.
Journal entries in the books of Loss Holder Share broker,
Brokerage fees are the income. Those fees are payments against facilitating its customers to purchase and sell shares.
Conclusion:
Commission Receivable Journal entry is to record assets and income. Said differently, this is a record based on accrual accounting. There will be a deferment of receipt. But we need to record the transaction as it occurs. So, Commission Receivable, a real account, will be debited, and Commission Income shall be on the credit side of the Journal Entry.
