Commission income refers to fees earned by brokers and agents in making a sale or closing a deal. It is the primary revenue account of real estate brokers, stock brokers, insurance agencies, etc.
Commission Income is an income account. It is presented under income or revenues in the income statement.
Commission Income is the primary revenue account of businesses that primarily make money from making sales or closing deals for third parties. Examples include real estate brokers, stock brokers, insurance agencies, travel agencies, and the like.
The journal entry to recognize commission income is similar to any other entry that records income. The pro-forma journal entry is:
The collection of the amount is recorded by debiting Cash. Commission Income is recorded by crediting it. Income accounts are credited to increase their amount.
If the amount is to be collected at a future date but the commission has already been earned (i.e., the deal was already closed and the amount has been recognized by the other party), then it is recorded with a debit to a receivable account, such as Accounts Receivable or Commissions Receivable. "Accounts Receivable" is often used for open accounts related to the primary operations of the company.
1. AREKI Company, a real estate brokerage firm, closed a deal worth $5,000,000 and received 5% commission. The journal entry to record the commission income is:
2. SEIDO, a stock broker company, was tasked to buy shares of stock for Mr. Davis. SEIDO charges 2% brokerage fees. The company was able to buy $500,000 worth of stocks. Mr. Davis will pay the cost of the shares and brokerage fees after 7 days. In SEIDO's books, the journal entry to record the brokerage commission would be:
Note: The above entry is for the commission income only. There is a separate entry for the purchase of the stocks. It can also be incorporated with the above to make a compound entry. Also, account titles used by businesses vary. These things depend upon factors such as company preferences.