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A Brief Discussion on Commission Received Journal Entry:
The accounting treatment to Commission Received Journal Entry is similar to any other income Journal Entry. It is an income to the entity against providing some services or making affiliate sales.
How about an example to understand this concept?
ABC Company is into the real estate business. It had launched a new project with 1000 plots of land, and each plot area equals 500 square yards. The price for each plot is Rs.18,000.
The real estate business wants to get back its capital as soon as possible. So, they employed agents to push for more sales and reach the break-even point. Company pays agents @ 25% on the sales price of plots sold.
If a Marketing agent can sell two plots, the Percentage of Commission received will be Rs.9,000 (Rs.4,500 per plot).
In this example, marketing agents received 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 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 is below along with 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 rule of accounting is to debit all expenses and losses and credit all incomes and gains.
There is a need to recognize the receivable if there is a credit period for payment. So, debit the accounts receivable because the Real account’s golden rule of accounting is debit what comes in, and credit what goes out
JE 2 – Recording the payment
Understanding the Journal Entry 2:
Above entry is to account 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 be receiving cash/bank and let go of the asset account. In other words, Accounts receivable asset replaces the Cash GL. So, entity records journal entry by reversing AR GL and increasing Bank account.
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 which is paying the Commission.
Practical Example – for Commission expenses
TTT is a cloth dealer and pays his employee’s 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 = Rs.1,00,000
Percentage Value of Commission on Sales = Rs.15,000
Commission is paid by the TTT manufacturers and received by employees. Let’s see the journal entry in the books of the entity TTT below.
The two GLs in this transaction are the Commission expenses account and 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?
Lets assume TDS rate as 1% on 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, there is no change in the expenses account value. Therefore, debit side GLs do not get affected.
Once the Payments are made, the Salary Payable and TDS payable GLs are debited for respective amounts with a corresponding credit to Bank Account.
Conclusion for Commission Received journal entry :
The Commission received is 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.
Accounting isn’t a rocket science. The key aspect is to learn the golden rules and spend time in understanding the various journal entry. We have listed down below a couple of JE articles: