Commission earned but not received is a revenue item that appears in a company's final accounts. It represents the commission a company has earned from its work but has not yet received in cash.
This concept arises when a company provides services or goods on a commission basis. In such scenarios, the company earns a percentage of the total sales generated through its efforts.
For example, a real estate agent earns a commission based on the sale price of a property they sell. The agent might earn the commission in the month the property is sold, but the payment might not be received until the following month.
How it's treated in final accounts:
- Accrual accounting: The company records the commission as earned in the period it is generated, regardless of whether the cash is received.
- Balance sheet: The commission earned but not received is reflected as a debtor in the balance sheet. This represents the amount owed to the company by its clients.
- Income statement: The commission earned is included in the revenue section of the income statement, even though the cash has not been received.
Example:
- A company earns a commission of $10,000 on a sale in December but receives the payment in January.
- In December, the company records $10,000 as commission earned and a $10,000 debtor on its balance sheet.
- In January, when the cash is received, the company records a $10,000 cash inflow and reduces the debtor by $10,000.
Practical Insights:
- This accounting treatment ensures that revenues are recognized in the period they are earned, providing a more accurate picture of the company's financial performance.
- It is crucial for companies to track their commission earned but not received to ensure they are not missing out on any potential revenue.
- Proper documentation and timely follow-up with clients are important to ensure the timely receipt of commissions.
