What Is a Sales Commission in Accounting?

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Most people who ever received a telemarketing call know the conversation can be unpleasant, especially if the salesperson on the other end of the line operates on a commission basis. Businesses often resort to telemarketing practices to increase sales and improve profitability. They put into place adequate accounting policies to track profitability, solvency and sales commissions.

Definition

  • A sales commission is a fixed or variable sum of money that a company pays to its sales force, in an attempt to motivate personnel and spur revenues. The business can calculate the commission as a percentage of total sales figures or as a flat amount, depending on the sector and products covered. To make sure salespeople keep a long-term view of operating activities, some organizations -- such as insurance companies -- pay sales commissions several months after customers sign contracts or buy merchandise. This prevents companies from incurring losses if clients ultimately rescind their contracts or return merchandise.

Accounting

  • To record a sales commission, a corporate bookkeeper debits the sales commission account and credits the commission payable account. When the business pays the commission, the bookkeeper credits the cash account and debits the commission payable account to bring it back to zero. Companies indicate sales commissions in the selling, general and administrative -- or SG&A -- expenses section of an income statement. In accounting terminology, crediting the cash account means reducing corporate funds. This runs counter to the banking practice.

Financial Reporting

  • As an SG&A item, a sales commission reduces a firm's net income -- which is another component of the income statement, also known as a statement of profit and loss, or P&L.

Illustration

  • Suppose a company wants to spur sales in one its nonperforming segments, attempting to halt the mediocre performance the unit has posted in the previous three years. Corporate management comes up with an incentive program aimed at compensating sales personnel proportionately to sales volumes. Top leadership draws up the following commission scheme: total sales below $10 million, 5 percent commission; total sales from $10 million to $20 million, 10 percent commission; and total sales above $20 million, 20 percent commission. The commission schedule reinvigorates the sales force in the previously sluggish department, and they generate total quarterly revenues amounting to $45 million. Total sales commission due equals $6,050,000, calculated as follows: total sales below $10 million, 5 percent commission, or $50,000 ($10 million times 5 percent); total sales from $10 million to $20 million, 10 percent commission, or $1 million ($10 million times 10 percent); and total sales above $20 million, 20 percent commission, or $5 million ($45 million minus $20 million times 20 percent).

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