Recording Commission Income In Bookkeeping Records
How to enter commission income in the bookkeeping accounting records of a small business.
Open an Income account and call it Commission Income (you can just call it Commissions if you know you don’t have an expense account of the same name). Commission Income goes onto the Income Statement, also called the Profit and Loss Report under Income.
There are two methods of entering commission income:
1. Cash method
When the commission payment is received into your bank account you will enter the payment to the Commission Income account.
Cash Method Journal Entry
Debit Bank account
Credit Commission Income account
2. Accrual method
The product owner may send you a Statement of your commissions before you receive the actual payment.
You can enter this as a sales invoice in your bookkeeping software.
The amount will be entered to the Commission Income account.
The invoice will remain as unpaid under your Accounts Receivable account on the Balance Sheet until such time as you receive the actual payment.
Once payment is received into your bank account, look for the invoice in your bookkeeping software and pay it.
Accrual Method Journal Entry
1. Sales Invoice
Debit Accounts Receivable account
Credit Commission Income account
Debit Bank Account
Credit Accounts Receivable account
There are some other technicalities around commission income which are covered in the question and answer section below.
commission Income questions
From real Business Bookkeepers/Owners
question 1: gallery accounting for selling artwork
I have a Gallery and am starting selling art work for other artists.
I am paid the full amount for the painting then I take my commission and pay the remainder to the artist.
How do I enter this and which amount will go against turnover?
You are holding onto, and showing, the art piece and rather than buying it when it sells (like some galleries do) you are looking after the money from the customer until such time as you pay it to the artist minus your commission. In this case, the amount the artwork sold for is not your income. Only the commission is your income (turnover).
If you put the money received from the customer into your gallery's bank account, then in your bookkeeping records you should show this amount in a balance sheet liability account - call it Artists Funds or similar.
When you pay the artist and take commission:
- in your bookkeeping records the amount you pay the artist will come directly out of the Artists Funds balance sheet account
- you will move your commission portion from the Artists Funds to a profit and loss account called Commission Income – use a journal in your bookkeeping software to do this
If you were one of those galleries that buys the artwork from the artist when the gallery sells it, you would have to:
- declare the full sales price as your income* (on the P&L as sales income)
- and the price you buy it for from the artist would be a cost of sale - commission does not come into this scenario.
- the difference between your sale price and the cost of sale is where your earnings comes into it.
*Lawyers and real estate agents are required to hold on to their client's money in special Trust accounts, so the client's money stays protected. It is always a good idea to hold client money in a specialized separate bank account from your day to day checking account so you don’t spend that money on your own business.
Question 2: Accounting for Real Estate Commissions
We received a large commission off a real estate sale. We put some of the money in cash in a safe deposit box and some was deposited into our business checking account. How do I record these transactions?
- In your bookkeeping software, open a new Asset account under your checking account on the Balance Sheet and call it Safe Deposit Box. This box is like a mini bank of its own so is treated like a bank account (except you're just dealing with cash).
- In your bookkeeping software, the original commission amount received can be split-deposited between the checking account and safe deposit box according to how much was deposited into each.
- Any cash moved between the checking account and safe deposit box just gets transferred in the bookkeeping software between the two accounts the same as if it was two bank accounts (like checking and savings).