How Are Sales Commissions Reported in the Income Statement
Sales commissions are typically reported as an expense in the income statement because they represent a cost incurred by the company to generate revenue. They are usually classified under “Selling, General, and Administrative Expenses” (SG&A) or a similar category, depending on the company’s chosen format for their income statement.
Here’s a simplified example of how an income statement might look with sales commissions:
ABC Company – Income Statement for the Year Ended Dec 31, 2023
- Sales Revenue: $1,000,000
- Cost of Goods Sold (COGS): $400,000
- Gross Profit: $600,000 (Sales Revenue – COGS)
- Operating Expenses:
- Selling, General, and Administrative Expenses: $150,000 (of which sales commissions are a part)
- Depreciation and Amortization: $50,000
- Total Operating Expenses: $200,000
- Operating Income (or EBIT): $400,000 (Gross Profit – Total Operating Expenses)
Then, other items like interest expense, taxes, etc., are subtracted to arrive at Net Income.
In some businesses where sales commissions are a significant cost, they may be broken out as a separate line item in the income statement to provide more detail. This can give readers of the financial statements a better understanding of the company’s cost structure and how much it spends to drive sales.
The recognition of sales commission expense should follow the matching principle, meaning it should be recorded in the same period as the revenue that the sales commission helped to generate. This may lead to sales commission expenses being deferred if they relate to revenue that will be recognized in a future period.
Example of How Sales Commissions Are Reported in the Income Statement
Let’s say we have a company named “TechSolutions Inc.”, which sells software services. They have a team of salespeople who earn a 10% commission on every sale they make.
In the first quarter of 2023, the sales team sells $500,000 worth of software services. The sales commission for this period would be $50,000 (10% of $500,000).
TechSolutions Inc.’s simplified income statement for Q1 2023 might look like this:
TechSolutions Inc. – Income Statement for Q1 2023
- Sales Revenue: $500,000
- Cost of Services: $200,000
- Gross Profit: $300,000 (Sales Revenue – Cost of Services)
- Operating Expenses:
- Sales Commissions: $50,000
- Other Selling, General, and Administrative Expenses: $100,000
- Total Operating Expenses: $150,000 (Sales Commissions + Other SG&A Expenses)
- Operating Income (or EBIT): $150,000 (Gross Profit – Total Operating Expenses)
Then, other costs like interest expense and taxes would be subtracted to arrive at the net income.
In this case, the sales commission is shown as a separate line item under Operating Expenses because it is a significant cost for TechSolutions Inc. This provides more transparency about the company’s costs and how much it spends to generate its sales.
Remember, this is a simplified example and actual company income statements would include more items and details. Also, companies can have different strategies and models for how they pay sales commissions, so the accounting can sometimes be more complex.
