What is commission accounting?
Commission accounting is how a company records sales commission in its books. Commission is pay, so it is booked as a payroll expense (commission expense). The key principle is accrual: commission belongs to the period in which the rep earns it, not the period in which it is paid.
This matters because commission is usually paid a month or more after the deal closes. Without accruals, December looks cheap and January looks expensive, even though the sales happened in December.
Accruing commission
The Danish Financial Statements Act (årsregnskabsloven) requires transactions to be recognized when they occur, regardless of when payment is made (section 13(1)(6)). International standards follow the same accrual principle. For commission this means:
- Earned but not paid: booked as an expense and a liability (accrued commission) in the period it is earned.
- Paid as an advance: a commission draw that has not yet been earned is a receivable from the rep until it is offset.
- Uncertain amount: if the period is not approved at month end, book an estimate and adjust it once the amount is approved.
When commission is earned is set in the commission plan, for example at signature, invoice or payment. The plan's earning rule therefore decides which period the cost belongs to.
Example
Three reps each earn DKK 28,000 in commission in December. The commission is approved in early January and paid with the January payroll. The financial year follows the calendar year.
| Date | Account | Debit | Credit |
|---|---|---|---|
| 31 December | Payroll expense, commission | DKK 84,000 | |
| 31 December | Accrued commission | DKK 84,000 | |
| January (payroll) | Accrued commission | DKK 84,000 | |
| January (payroll) | Bank and payroll liabilities (tax withheld etc.) | DKK 84,000 |
The cost of 3 × DKK 28,000 = DKK 84,000 lands in December, when the sales happened. Account names vary between charts of accounts. At year-end, use our year-end commission checklist.
What to include besides the commission itself
- Tax: in Denmark commission is taxed as salary through payroll. See tax on commission in Denmark.
- Holiday pay: commission counts towards holiday pay, which can create a liability. See holiday pay on commission.
- Clawbacks and corrections: a clawback reduces the expense in the period it is recorded and is usually deducted from the next payout.
- Multi-year contracts: companies reporting under IFRS may have to capitalize commission on customer contracts. See capitalizing commission (IFRS 15).
FAQ
Which account is commission booked to?
Commission is booked as a payroll expense, often on a separate account for commission or variable pay so it can be tracked on its own. The exact account depends on your chart of accounts.
Is commission booked when earned or when paid?
When earned. If it is earned in one period and paid in the next, it is booked as accrued commission at the end of the period.
What if commission is not approved at month end?
Book an estimate based on the draft statement and adjust it once the amount is approved. The closer the estimate is to the final amount, the smaller the adjustment.
Is commission tax-deductible for the company?
Commission is pay and therefore normally an operating expense. Tax treatment can differ from the accounting treatment, so check with your auditor.
Accounting with numbers from Prowi
In Prowi, each rep's commission statement updates live through the period. When the period closes, it awaits approval, and approved amounts are passed on to payroll, directly to Zenegy or as a payroll file for systems such as Danløn and Visma Dataløn. Finance can use the approved statements as the basis for accruals. Book a demo.
In Prowi
Every term on this page is a rule you can write into a commission model in Prowi. The model reads the deal from HubSpot the second it closes, applies the rule, and the rep sees the result on their phone before the day is over.