Most sales commissions are a selling expense, and so should be reported on the income statement as part of operating expenses. Often, they will appear under the selling, general, and administrative expenses (SG&A) category.
More precisely, how you report sales commissions depends on whether they were earned or due:
- If earned by a company, sales commissions should be reported as revenue.
- If due to a third-party, sales commissions should be reported as an expense.
Commission expenses should be reported as a selling-related expense (similar to other operating expenses) if they pertain to the company’s core activities. Otherwise, they should be reported in the “other expenses” category.
Using the accrual basis method (not the cash basis method), any commission revenue should be reported as soon as the commission is considered earned. The money does not need to be actually paid.
And any commission expense should be reported as soon as the company has incurred a liability and expense. For example, this could be when a third-party has earned the right to a commission. Here too, money does not need to be actually received.
Note that sales commissions are not part of the cost of a product. Therefore they should never be assigned to the cost of goods in inventory or sold. Finally, due to accounting requirements, you must be able to correlate each payment to each customer, and may need to amortize as per accounting standard rules (ASC 606).
Make sure you use an SPM solution which helps you do this and read our detailed post about amortization here.