The basics for sales compensation plans accounting

Finance and sales coordination

There are many accounting implications to the design, implementation, and management of sales compensation plans. Here we have just a part of these implications, this will give you an idea of the accounting panorama in sales commissions. Plus, you can start planning and changing your commission plan accordingly.

As a sales director, you should review and be aware of the accounting issues that affect the design of your sales compensation plans and programs. Also, research about the accounting control and audit triggers for your commissions. And, examine commission accounting processes using a commission tracking software like Blitz.

As more revenues generated, the more commissions your reps will earn. Therefore, sales compensation plans are a direct cost. Also, part of absorption costing. The variable costs for sales commissions is a direct product cost. For more commission plan essentials, click here.

The accounting of sales commission expenses has become more challenging and complex for finance leaders. Alignment between sales and finance leaders is critical for organizations. As a matter of fact, organizations should not underestimate the effort and necessary analysis of their sales compensation plans and sales data.

Sales compensation plans are like salaries?

In accounting, sales commissions are not treated as salaries. Commissions only arise as an expense when a revenue-producing event occurs. It is common to defer recognition of a sales expense to properly match it with the revenue or profits being produced.

There’s a key point in accounting for sales compensation plans, the matching principle. It states that a business books the expense during the period when they are incurred. And, not precisely when the expense happens. And, the matching principle can turn compensation into a differed expense.

Changes in laws regarding revenue recognition also affect how a business accounts for the associated commission expenses. Therefore, commissions should be tracked at a more detailed level: impact of all paid commissions, time over which to amortize expense, and contract terms.

And, one of the most important points in accounting for sales compensation plans is to get data in order. A sales compensation software accomplishes that. It automates and tracks each step in the commission process. A great solution is Blitz because it avoids all kinds of mistakes and manual errors. Schedule your demo now.

Source

Biswas, Bashker. Compensation and Benefit Design: Applying Finance and Accounting Principles to Global Human Resource Management Systems. Pearson FT Press, 2015.

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