The commissions expense is an account on an income statement generated with the accrual method of accounting. It shows how much was slated to be paid in commissions during the same period that the related revenue was earned. This kind of expense is accounted for in the same period as commission liability as well.
There are multiple acceptable ways to classify a commissions expense. As it is a cost of maintaining the sales department, it can be categorized as a sales expense. It may also be categorized as a cost of goods sold, because it is one of the expenses related to offering the service or product for sale.
Whether to use this kind of expense classification depends upon who is receiving the payment. If a salesperson earns the commission, then it is an expense. In a case where the company earns the commission, then it is revenue. When a company receives a commission, it may choose to absorb it into accounts receivable. It this case, it may still be further categorized as a commissions expense.
A commissions expense will be recorded for the time period in which the commission was earned even if it has not been paid in that time frame. This typically happens when commission payments are made on a specific day of the month, rather than directly following the sale. If the commission has not been paid, it must be recorded as commissions payable as well. It is also accurate to categorize an unpaid commission as an accounts payable item, as this category can include amounts due to employees, vendors, and contractors.
The process of recording a typical commissions expense, where a salesperson is paid commissions at specific intervals, such as monthly or quarterly, is as follows. A salesperson makes a sale, which brings in revenue. The commission is calculated on this revenue.
Then the amount is recorded as a debit in commission expenses and a credit in commissions payable. The next period, when the salesperson is to be paid, commissions payable is changed to debit and the commissions expense is now a credit. Then the actual payment is recorded as a debit for commissions expense and a credit for cash.
Commissions expense can come from several different kinds of payment. Most commissions are based on a percentage of the revenue earned. Another common method is to pay the salesperson a flat fee. More unusual payment arrangements include determining commission based on the net income or gross margin associated with a particular sale.