Accrued Commission Expense Journal Entry

Commission expense is an operating expense that businesses incur when paying a fee or commission to an individual, broker, real estate agent, or salesperson, for services to secure the sale. The fee is often based on a percentage of the sale amount.

Unlike salary expenses, commission expenses are typically performance-based. Therefore, they are almost always connected to some type of sale that results in a portion of that return going to the representative responsible for generating that sale.

Analyzing past revenue while starting off in any commission-based role is important to understand how much money one should expect to spend in order to achieve target sales. Additionally, keeping track of all costs involved during negotiations can help ensure that commissions never exceed expectations when managing such business operations.

The matching principle states that all revenue and expenses must be recorded in the same period in which they are incurred. This means that all income must be reported in the same period as the associated costs, thus creating a well-balanced picture of a company’s performance.

Maintaining this balance between revenues and expenses will provide an accurate report on profitability and any potential problems. For example, if an income statement is created at the end of the accounting year, both revenues for that period and all associated expenses will be included in order to come up with a net income. While this may not seem important at first glance, proper record-keeping and adherence to the matching principle ensure an accurate assessment of a business’s performance over a certain time frame.

Accrued commission expense is the expense that is recognized even though cash has not yet been paid. This could include any commissions or incentives based on sales or other types of transactions that have occurred but as of yet, payment has not been made. As such, an accrued expense should be recognized on the company’s balance sheet and through an adjusting entry in its income statement.

Journal Entry to Accrued Commission Expense

The company makes payments depending on the agreement between company and the broker. When making sale, the commission expense will incur in the same period as well.

The journal entry is debiting commission expense and credit accrued liability.

The commission expense will be recorded as the expense on the income statement. The accrued liabilities will be recorded as the obligation on the balance sheet.

Example

Company ABC made a sale of $ 500,000 during the month. The company needs to spend a commission of 5% on the total sale. However, it is not yet the payment date. Please prepare journal entry to record accrued commission expenses.

The company already makes sales, so the commission expense is already incurred as well. They should account for the expense even if the payment has not yet been made.

Commission expense = $ 500,000 * 5% = $ 25,000

The journal entry is debiting commission expense $ 25,000 and credit accrued liabilities $ 25,000.