Optimizing Sales Commission Accounting

Erik serves as a subject matter expert on the interlocking fields of revenue intelligence, revenue performance, and revenue optimization. Erik focuses on helping Xactly drive expansion and growth by better aligning positions, responsibilities, and incentives to be in sync with achievable strategic and tactical goals. He is an accomplished professional with more than two decades of experience in marketing, consulting, and product evangelization.

Explore how accounting technology can simplify calculations, reduce errors, and improve reporting accuracy, keeping you ahead of the curve as sales models and accounting standards evolve. You may be wondering why the ASC 606 regulation came to be in the first place because it seems to complicate the process of sales commission accounting. While it does complicate the process manually, you can utilize an automation solution to make it easy again.

Proper alignment within financial statements ensures transparency and fidelity in the company’s reported earnings and liabilities. A sales commission paid to an employee or an external agent that is contingent upon a customer signing a contract is an incremental cost. For instance, if a salesperson earns a $5,000 commission only when a specific client contract is executed, that $5,000 is an incremental cost. Remember, navigating the complexities of sales commission accounting doesn’t have to be overwhelming. QuotaPath offers a comprehensive suite of tools to streamline your processes, ensure accuracy, and empower data-driven decision-making.

This section will guide you through creating audit-ready reports, tailored for the SaaS industry. If there are multiple performance obligations, the transaction price must be allocated to each based on their standalone selling prices. Performance obligations are promises to deliver goods or services to the customer.

Be aware, this high-risk, high-reward setup could result in a revolving door of staff if not managed well. With this flexibility, the commission plan can build new levels upon one another, adjust rates, or throw in a new incentive as the business environment changes. A flexible commission structure is that which is kept in place without being overhauled time and again by the growth and dynamic strategic priorities so that it remains stable. Our enterprise-grade ICM was built by sales comp experts for sales comp professionals. For more than 15 years, we’ve helped hundreds of sales commission accounting sales teams in dozens of industries, striking the perfect balance between flexibility and ease of use. SaaS leaders often juggle evolving customer needs, leading to contract modifications.

Best Practices

• So, if your salesperson makes a sale today, but only gets their commission check during next month’s pay day, you will be recognizing the revenue at the time of the sale this month.
• This means you must separate a commission for a product whose revenue is booked on schedule from the commission for the delivery that books its revenue on a different time frame.
• This fosters trust with your sales team and ensures your financial statements accurately reflect your company’s performance and profitability.
• ASC 606 governs revenue recognition from customer contracts, while ASC 842 focuses on lease accounting.
• Effective implementation of ASC 606 requires a deep understanding of its principles, a review of contractual obligations, and the adoption of suitable technological solutions.
• Introduced in 2014 and effective since 2018 for public companies, ASC 606 replaced standards like ASC 605 to standardize financial reporting across industries.

If you’re an organisation that operates with commissions, then you’re aware of how chaotic commission accounting can become. Commissions create the need for many line items that often move between accounting periods. See how QuotaPath helps by automating sales commission recording for ASC 606 compliance. Imagine you provide Mark with a $1,500 “recoverable draw” against future commissions. If Mark earns $2,000 in commissions for the month, you’d pay him the remaining $500 ($2,000 earned minus $1,500 draw), and the draw account returns to zero. When you pay commissions as part of the regular payroll, it means that the sales bonuses are included in your employees’ regular paychecks.

For ASC 606, subtopic 340 compliance, it’s essential you document specific information. Record sales made by each sales representative, the type of product or service sold, and the terms of the sale. Commissions, just like regular salaries, are subject to taxes, and you’ll need to account for this in your payroll. These deductions will cover various tax obligations, depending on your jurisdiction.

Recording sales commissions in your accounting system

Conversely, if commissions are prepaid, they are recorded as assets, specifically under prepaid expenses, until the corresponding sales are recognized. This careful tracking helps maintain the integrity of the financial statements, providing a clear view of the company’s financial obligations and resources. Proper recording of sales commissions enables the company to do better financial planning and forecasting. This will clearly show the liabilities that are financial, hence the planning of the future expenses.

Given its importance, managing sales commission accounting correctly ensures that financial statements are precise and that sales representatives are appropriately compensated. Understanding terms like commission paid journal entry and their implications in accounting is vital for sound financial management. Success requires viewing commission accounting as an ongoing operational discipline rather than a one-time compliance project. Customer behavior evolves, product offerings change, and commission structures adapt—your accounting policies must keep pace. Annual policy reviews should assess customer lifetime data, renewal rates, and commission structures, adjusting amortization periods when customer behavior shifts meaningfully.

The journal entry for amortization is a debit to Commission Expense and a credit to the Deferred Commission Asset. Using the previous example of a $6,000 commission on a three-year contract, the annual amortization expense would be $2,000. A clear example of an incremental cost is a sales bonus paid for signing a new client, as the company would not pay it if the deal did not close.

Accounting Journal Entries for Jane’s Sales Commissions in March (Cash Basis):

Book a 30-minute call to see how our intelligent software can give you more insights and control over your data and reporting. Since December 2017, public companies have been under compliance of ASC 606 (IFRS 15), whereas private companies have been under compliance since December 15, 2018. This is part of the ASC 606 matching principle, which we will touch on in more detail shortly.

• Under this structure, commission is calculated as a percentage of the profit margin on a sale, which is the selling price minus the cost of goods sold.
• They can be found in the general ledger accounts as selling expenses and on the income statement as operating expenses.
• Businesses must carefully consider their specific needs and market conditions when choosing a commission model.
• Imagine that the same SaaS company has three different contracts with capitalized commissions.
• Beyond the income statement, sales commissions also impact the balance sheet.

Complicated or multiple commission structures within an organization combined with the intricacies of ASC 606 compliance further confuse matters. The most common type of commission structure across SaaS consists of a base salary plus a commission plan. We recommend a 50/50 split, where reps earn 50% of their pay from their base salary with the other half based on sales earnings.