USA Recognition of commissions expense

[Frank16]

My current company's salespeople's commission is earned and paid at the time our customer pays us, not when the sale is made. When should the commissions expense be recognized?

 

[kirby]

You owe the commission when earned. Earned when sale "made" (agreement signed)

 

[Frank16]

You owe the commission when earned. Earned when sale "made" (agreement signed)

But the commissions is not earned until the customer pays. If the customer does not pay or if they pay after their invoice is outstanding for more than 90 days the salesperson does not get paid.

 

[Steve-LevelUp]

We need to remember the accounting principles (matching). When the sale is made, revenues are recorded. All expenses related to that sale also need to be recorded. This would include commissions. The terms upon which that commission is paid is separate from when the expense is recorded.

 

[Frank16]

I am wrestling with reporting costs/expenses when incurred vs the matching principle. If we don't get paid or get paid after 90 days there is no commission expense incurred.

 

[Steve-LevelUp]

That certainly makes sense, so an assessment of 'likelihood' would apply. There are three possible approaches.

1. Accrue 100% of commissions as the hope is that all clients pay within 90 days.
2. Accrue a percentage of the commissions based on a historical assessment of the number of clients that pay within 90 days.
3. Do not accrue anything if more than half of your clients pay after 90 days.

I think taking an approach based on how often commissions are actually paid out would give you an idea how to best approach this situation.

In my experience, I record 100% of commissions as an expense when the invoice is issued. Any invoices not paid, I then reverse the commission once it is certain that the commission would never be paid.

I hope that helps.

Feel free to contact me if you wish to discuss further.

 

[Dspeck]

My current company's salespeople's commission is earned and paid at the time our customer pays us, not when the sale is made. When should the commissions expense be recognized?

I understand why you don't pay the commission when earned but do not understand your hangup with adhering to GAP. There is an alternative; it's called cash-basis accounting (as opposed to accrual.) But, if your business is incorporated, you must use accrual accounting anyway. You're making this more of a problem that it really is.