Where are Sales Commissions Reported on the Income Statement?

Where are Sales Commissions Reported on the Income Statement

Sales commissions are typically reported as an operating expense on the income statement. They are considered a part of the costs incurred to generate revenue and are thus matched with the revenue they help to create, in accordance with the matching principle of accrual accounting.

Depending on the level of detail and the format of the income statement, sales commissions may be listed as a separate line item under operating expenses, or they may be grouped together with other selling, general, and administrative expenses (SG&A). Some companies may also include them under “Cost of Sales” or “Cost of Goods Sold” (COGS) if the commissions are directly attributable to the sale of goods or services.

Example of Where are Sales Commissions Reported on the Income Statement

Let’s consider a detailed, fictional example with a company named “GlobeTravel Inc.,” which is a travel agency. GlobeTravel pays its sales team commissions based on the vacation packages they sell. For simplicity, let’s assume the company had $1 million in revenue for the year, $600,000 in cost of goods sold (COGS), and other expenses in addition to sales commissions.

GlobeTravel Inc.

Income Statement for the Year Ended December 31, 2022

Revenue:
  Vacation Package Sales:        $1,000,000

Cost of Goods Sold (COGS):        
  Hotel Bookings:                $300,000
  Flight Tickets:                $200,000
  Miscellaneous Costs:           $100,000
                                ----------
Gross Profit:                    $600,000

Operating Expenses:
  Selling Expenses:
    Sales Commissions:           $40,000  <-- Sales Commissions here
    Marketing and Advertising:   $30,000
  General & Administrative (G&A):
    Salaries:                    $150,000
    Office Rent:                  $50,000
    Office Supplies:              $10,000
                                ----------
Total Operating Expenses:        $280,000

Operating Income:                $320,000

Other Expenses:
  Loan Interest:                  $20,000
                                ----------
Pre-Tax Income:                  $300,000

Income Taxes:                     $90,000
                                ----------
Net Income:                      $210,000

In this income statement, “Sales Commissions” are clearly specified under the “Selling Expenses” category within “Operating Expenses.” This layout allows anyone reviewing the income statement to see how much the company is spending on sales commissions in relation to its other costs and revenues. This level of detail is valuable for managers, investors, and other stakeholders who may be interested in understanding the company’s profitability and cost structure.