Manager’s Commission Expense

A business will often pay a manager’s commission based on a percentage of its profits. It is usual to take into account the expense of the commission in arriving at the profits used to calculate the commission.

Manager’s Commission Formula

It appears that we need to know the profit after the commission in order to calculate the commission itself. In order to do this we need to first express the profit after commission in terms of the profit before commission as follows:

Profit after commission = Profit before commission - Commission
Profit after commission = Profit before commission - Profit after commission x Commission %

Rearranging we get
Profit after commission = Profit before commission / (1 + Commission %)

The commission calculation is now based on the profit before commission using the manager’s commission formula as follows:

Commission Calculation Example

Suppose a business pays a manager a 4% commission based on its profits after expenses including the commission. If the profits before the commission are 11,700 then using the formula we can calculate the commission as follows

Commission = Profit before commission x Commission % / (1 + Commission %)
Commission = 11,700 x 4% / (1 + 4%) = 450

Using the formula the manager’s commission for the accounting period is calculated as 450.

Formula Verification

To show that the formula is correct we can now use this commission value (450) to verify that it is in fact 4% of the profits after commission as originally required.

Profit after commission = Profit before commission - Commission
Profit after commission = 11,700 - 450 = 11,250

Commission % = Commission / Profit after commission
Commission % = 450 / 11,250 = 4%

Manager’s Commission Expense Accounting

The commission is an expense of the business which is recorded with the following journal entry.

The journal shown above debits the commission expense account which represents the cost to the business. The credit entry to commission payable reflects the liability of the business to pay the commission.

It should be noted that if the commission relates to an employee, the commission expense would need to be accounted for as a payroll expense and income tax deducted accordingly. Further information on the posting of payroll costs can be found in our payroll accounting post.