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Glossary Terms
Compass - The Only Sales Glossary You Need
Commission expense is recognized in the company's financial statements in the period when the related sales transaction occurs, aligning with the principle of matching expenses with revenues. Properly accounting for commission expense is crucial for accurately assessing the company's profitability and financial performance.
Commission expense is the cost a company incurs to pay salespeople or agents a percentage of the sales they generate. It is typically recorded as a selling expense on the income statement and varies based on the sales volume or specific agreements with employees or partners.
COGS refers to the direct costs incurred by a company in producing goods or services that have been sold during a specific accounting period. These costs typically include expenses such as raw materials, labor, and manufacturing overhead directly attributable to the production process. COGS is deducted from the company's revenue to calculate its gross profit. Unlike commissions, COGS is directly related to the production or acquisition of goods and is not considered an operating expense.
Commission expense plays a crucial role in motivating sales teams and driving revenue. It aligns employee incentives with business goals, encouraging higher performance. From an accounting perspective, tracking commission costs helps businesses monitor profitability and manage operational budgets more effectively.
Several factors influence commission expense:
Efficient management of these factors ensures that commission costs remain aligned with revenue goals.
To record a commission expense, follow these basic steps:
This ensures your financial records accurately show both the expense and the liability.
Commission expense is calculated using a predetermined formula—most commonly a percentage of the sales value. For example, a 5% commission on a $1,000 sale results in a $50 commission cost. Businesses may also implement tiered or bonus-based commission structures based on targets.
Accounting for commission expenses involves recognizing, recording, and reporting them accurately in financial statements:
