USA How to account for commissions

Jun 16, 2017
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United States

Wholly owned start up subsidiary
Manager is paid commissions on sales by parent company

As the parent, where would you charge the commission payment?

DR ??
CR manager AP

DR manager AP
CR bank

Start up costs? commissions? Manager bonus?



John Baker

Your answer depends on the arrangements for settlement, budgeting, and accountability.
Some commissions are paid at the time of sale, not at the time of collection. This is a very poor system for internal control purposes and for accountability. When commissions are paid prior to any collection, cash flows are impacted with negative results prior to any internal control administration for charge backs, return authorizations and so forth. Accountability suffers when staffing is at a minimum and the individual who has the commission leaves the company. In any event, establish in your chart of accounts, for the subsidiary, DEBIT = PREPAID COMMISSIONS EXPENSE SUBSIDIARY, CREDIT = CASH. No further accounting is necessary.

When commissions are earned by not paid, DEBIT = COMMISSION EXPENSE SUBSIDIARY, CREDIT = SUBSIDIARY COMMISSION PAYABLE. When commission is paid, either in total or in part, DEBIT = SUBSIDIARY COMMISSION PAYABLE, CREDIT = CASH.

With subsidiaries, is vital to maintain subsidiary ledgers and separate managerial decisions and accountability. This is especially the case when detecting fraud, mismanagement, and charge backs when there seems to be "no one at the helm" of the subsidiary.

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