Commissions Received Account

Overview of Commissions Received Account

The Commissions Received Account is an accounting ledger used to track the earnings an organization receives through commission-based transactions. This type of account plays a crucial role in the double-entry bookkeeping system, ensuring that all financial transactions are accurately recorded and reported.

Detailed Description

In accounting, commissions received from sales or services rendered are considered as income or revenue for the organization. When a commission is earned, it impacts the accounting records through the following entries:

The Commissions Received Account is credited. (Credit indicates an increase in revenue.)
The offsetting account (such as the bank account or accounts receivable) is debited. (Debit indicates an increase in assets or a reduction in liabilities.)

Example:

When a company receives a commission payment of $500 from a debtor:
- Debit: Accounts Receivable $500
- Credit: Commissions Received $500

This entry ensures that the revenue earned through commissions is properly accounted for in the financial statements.

Examples

Example 1: Commissions Earned from Sales:
- Company A sells a product on behalf of Supplier B and earns a commission of $1,000.
- Entry here would be:
  - Debit: Accounts Receivable $1,000
  - Credit: Commissions Received $1,000
Example 2: Commissions Payment Received in Cash:
- Company C receives a cash payment of $2,000 for monthly earned commissions.
- Entry here:
  - Debit: Bank Account $2,000
  - Credit: Commissions Received $2,000
Example 3: Combining With Commissions Paid Account:
- Suppose a mixed account scenario:
  - Company D records received commissions $500 and, in the same period, paid out $300 in commissions.
  - Independent Entries:
    - Debit: Bank Account $500
    - Credit: Commissions Received $500
    - Debit: Commissions Paid $300
    - Credit: Bank Account $300

Frequently Asked Questions (FAQs)

Q1: Is a commissions received account considered revenue?

A1: Yes, commissions received are considered revenue and are recorded as income in the financial statements.

Q2: How is the commissions received account presented in financial statements?

A2: It is usually classified under operating income or revenue in the income statement.

Q3: Can commissions received be combined with a commissions paid account?

A3: Yes, in some accounting practices, both commissions received and paid could be managed within the same ledger for simplicity, although commonly they are kept separate.

Q4: What type of account is the commissions received account in double-entry bookkeeping?

A4: It is an income account, indicating an increase in revenue when credited.

Q5: How to verify commissions received are accurately recorded?

A5: Reconciliation with bank statements, transaction records, and debtor’s accounts can help ensure accuracy.

Commissions Paid Account: An account tracking commissions the company pays out, often debited in the company’s ledger in contrast to commissions received.
Accounts Receivable (AR): Money owed to a company by its debtors, debited when commission transactions are made on credit.
General Ledger (GL): The central book of accounts where all financial policies, debits, and credits of the company are recorded.
Revenue: The income generated from normal business operations, which includes commissions received.

Online Resources

Suggested Books for Further Studies

“Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
“Accounting Theory and Practice” by Glautier and Underdown
“Financial Accounting” by Walter T. Harrison Jr., Charles T. Horngren

Accounting Basics: “Commissions Received Account” Fundamentals Quiz

### What type of account is the "Commissions Received Account"? - [x] Revenue - [ ] Expense - [ ] Liability - [ ] Asset > **Explanation:** The Commissions Received Account is a revenue account as it records the income earned by the organization through commissions. ### Which account is typically credited when a commission is received? - [x] Commissions Received - [ ] Bank Account - [ ] Accounts Payable - [ ] Inventory > **Explanation:** The Commissions Received Account is credited to reflect the income earned through commissions. ### When recording commissions received, where is the offsetting entry made? - [x] Bank Account or Accounts Receivable - [ ] Commissions Paid - [ ] Sales Account - [ ] Inventory > **Explanation:** The offsetting entry (debit) is made to either the Bank Account if payment is received or Accounts Receivable if it’s still to be collected. ### How should you classify a commission payment made to a third party? - [ ] Revenue - [x] Expense - [ ] Liability - [ ] Asset > **Explanation:** Commission payments made are classified as an expense, opposite to commissions received which count as revenue. ### In the double-entry system, increasing a revenue account would involve what action? - [x] Crediting the account - [ ] Debiting the account - [ ] Belonging to customer accounts - [ ] No entry at all > **Explanation:** To increase a revenue account, you credit the account in a double-entry system. ### What main purpose does the commissions received account serve? - [ ] Track inventory levels - [ ] Record liabilities - [ ] Monitor staff expenses - [x] Record revenue from commissions > **Explanation:** The commissions received account specifically records revenue earned through commissions. ### If a commission is earned but not yet received, where do you record the debit entry? - [x] Accounts Receivable - [ ] Bank Account - [ ] Inventory - [ ] Prepaid Expenses > **Explanation:** If the commission earned is pending receipt, the debit entry is made to Accounts Receivable. ### What ledger will the record of commissions received typically be found? - [ ] Sales Ledger - [ ] Purchases Ledger - [x] General Ledger - [ ] Inventory Ledger > **Explanation:** The General Ledger contains the record of commissions received among other financial transactions. ### When commissions received are recorded in the income statement, under what section do they typically fall? - [x] Revenue or Operating Income - [ ] Cost of Goods Sold - [ ] Operating Expenses - [ ] Long-term Liabilities > **Explanation:** In the income statement, commissions received are categorized under Revenue or Operating Income. ### Can commissions received ever be reported under liabilities? - [ ] Yes, if they are paid out regularly. - [ ] Yes, if they exceed a certain threshold. - [ ] Yes, in any tax year. - [x] No, commissions received are always recorded as income. > **Explanation:** Commissions received are recorded as revenue and never appear under liabilities.

Thank you for exploring the intricacies of the Commissions Received Account and enhancing your accounting expertise with our informative content and engaging quiz questions. Happy learning!