Accrual for Sales Commissions on Financial Statements

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#1
dsocpa  
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Maryland
Client is trying to sell his construction business - to an accountant. This potential buyer has been trying to get an SBA loan for several months now and has requested YTD financials and a g/l dump through the F/S end date. As the accountant/bookkeeper I've been issuing the statements and a sales projection. Note: I've put disclaimer's all over the reports that they are "Management use Only",unadudited" and not intended for "outside parties". In July one of the salesman sold a project of a substantial size. The requested statements were provided with a journal entry on 7/31 booking the expense to sales commissions and removing his advances from the asset account "advances on commissions". The client went ballistic and stated the entry should have been recorded over the life of the contract and thus the entry distorted the Income Statement. My position is the salesman has received advances on commissions throughout the sales process and he is legally entitled to the commission once the contract is signed. This is the way the commission process has operated since I've worked with this client in 2010 (albeit on the books in a less sophisticated manner). Client is telling me the entry was not a true accrual. I disagree since the commissions were earned upon the client signing the contract. I'd appreciate any thoughts one way or another is my thinking out of line - regardless??
Side note: I'm seriously thinking of disengaging with this client due to other challenges and requests he has made regarding the financials.
 

#2
FishOn  
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31-Aug-2016 3:33pm
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If the sales commission is legally the clients upon signing of the sales contract, I agree with you. If the sales commission structure had some sort of claw back contingency based on full completion of the contract, I could see spreading it out over the life of the contract.

In my experience, most commissions are fully due to the sales team at the time of a signed sales agreement and I would record the expense when the agreement was completed. Based on what you've said, I believe you recorded this correctly by booking a receivable on commission advances and then removing that and booking the expense when the contract was completed and the commission was earned. Again, the facts of the commission arrangement could change this entry, though.
 

#3
dsocpa  
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FishOn thank you so much for your reply. The sales commission for this particular salesperson has always been upon contract signature. I did advise the client if that were to change at some point the commission expense would be correctly entered incrementally at designated milestones. They recently hired a new sales person with this incremental provision in his contract.
 


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