Estimated reading time: 5 minutes
A Brief Discussion on Commission Received Journal Entry:
The accounting treatment of the Commission Received Journal Entry is similar to any other income Journal Entry. It is income to the entity in exchange for providing services or making affiliate sales.
How about an example to help you understand this concept?
ABC Company is in the real estate business. It launched a new project with 1000 plots of land, each 500 square yards in size, and each plot’s price is $18,000.
The real estate business wants to return its capital as soon as possible. So, it employed agents to increase sales and reach the break-even point. The company pays agents 25% of the sales price of plots sold.
If a Marketing agent can sell two plots, the Percentage of Commission received will be $9,000 ($4,500 per plot).
In this example, marketing agents received a Commission against making real estate plot sales.
LIC agents are another Classic example of commission agents that we see daily. Of course, Aggregators like Policy Bazaar are replacing these agents.
Table of contents
- A Brief Discussion on Commission Received Journal Entry:
- How about an example to help you understand this concept?
- What’s the Commission Received Journal Entry?
- JE 1 – Recording the commission services transaction
- JE 2 – Recording the payment
- Practical Example – for Commission expenses
- Recommended Articles:
What’s the Commission Received Journal Entry?
The two General Ledger (GL) accounts that come into play for this transaction are
- Commission Received and
- Accounts Receivable or Debtor.
Journal Entries in the books of the agent who receives the Commission are below, along with an explanation:
JE 1 – Recording the commission services transaction
Understanding the Journal Entry 1:
Commission Received being income is a nominal account. Nominal Account’s golden accounting rule is to debit all expenses and losses and credit all incomes and gains.
Recognizing the receivable, if there is a credit period for payment, is necessary. So, debit the accounts receivable because the Real account’s golden accounting rule is debit what comes in and credit what goes out.
JE 2 – Recording the payment
Understanding the Journal Entry 2:
The above entry accounts for the Cash received against the Accounts Receivable. The GLs involved herein are Bank and Accounts receivable. These two GLs are real accounts. So, we shall debit what comes in and credit what goes out. Agents will receive cash/bank and let go of the asset account. In other words, the Accounts receivable asset replaces the Cash GL. So, the entity records journal entries by reversing the AR GL and increasing the Bank account.
Runners Insight:
Let’s learn the logical aspect of this second entry. We need to increase cash and decrease accounts receivable. The Easy rule to remember for any Journal entry involving assets is
To increase any asset, Debit the asset GL
To decrease any asset, Credit the asset GL
We already have the Accounts receivable Debit in the Journal entry. So, Credit the Receivables in the Journal entry to reduce it. Cash GL is nothing but a fill-in-the-blank for the entry. If AR is on the credit side, then the debit side is only the leftover portion. Therefore, Cash/Bank GL is debited. Consequently, we can also be logical when recording the journal entry.
In the initial example, we understood the journal entries in the books of entities receiving the Commission. Let’s see the entries in the entity’s books paying the commission.
Practical Example – for Commission expenses
TTT is a cloth dealer and pays his employees’ salaries with fixed and variable amounts. Variable amounts depend on the sales made and are calculated as a percentage of the total sales value created during the month. The Percentage of Commission is 15%.
Sales Details are:
Total Value of Sales made by an employee = $1,00,000
Percentage Value of Commission on Sales = $15,000
Journal Entry:
The commission is paid by the TTT manufacturers and received by employees. Below is the journal entry in the books of the entity TTT.
The two GLs in this transaction are the Commission expenses account and the Bank or Liability account.
Commission expenses A/c is a nominal account, and Salary Payable is a Personal Account. So, the Former GL is debited, and the latter one is credited.
What’s the Journal entry if there is any TDS element involved?
Let’s assume the TDS rate is 1% of the total commission for recording entry.
The payment is apportioned between employees and the government in the above entry. So, there is a split between the credit-side GLs. Irrespective of the recipient, the expenses account value does not change. Therefore, debit-side GLs do not get affected.
Once the Payments are made, the Salary Payable and TDS Payable GLs are debited for their respective amounts, and a corresponding credit is made to the Bank Account.
Conclusion for Commission Received journal entry :
The Commission received its income and is credited in the journal entry with a corresponding debit to accounts receivable or Bank if no credit period is allowed for this transaction.
Recommended Articles:
Accounting isn’t rocket science. The key aspect is learning the golden rules and understanding the various journal entries. We have listed below a couple of JE articles:
