What are the best practices for reconciling sales commissions and revenue recognition?

1 Understand the accounting standards

The first step to reconciling sales commissions and revenue recognition is to understand the accounting standards that apply to your business. Depending on your industry, geography, and business model, you may need to follow different rules and guidelines for recognizing revenue and expenses. For example, the International Financial Reporting Standards (IFRS) and the US Generally Accepted Accounting Principles (GAAP) have different criteria for when revenue can be recognized, and how to allocate it among multiple performance obligations. Similarly, the accounting treatment of sales commissions may vary depending on whether they are considered direct or indirect costs, and whether they are capitalized or expensed.

4 Review your commission accruals and adjustments regularly

The fourth step to reconciling sales commissions and revenue recognition is to review your commission accruals and adjustments regularly. Commission accruals are estimates of the commission expenses that you incur in a given period, but have not yet paid out. Commission adjustments are changes to the commission amounts that you pay out, due to factors such as refunds, cancellations, disputes, or clawbacks. Both commission accruals and adjustments can affect your revenue recognition and your income statement, so you need to monitor them closely and update them as needed. By reviewing your commission accruals and adjustments regularly, you can ensure that your commission expenses are accurate and consistent with your revenue recognition.

5 Communicate clearly and frequently with your sales reps and finance team

Communicating clearly and frequently with your sales reps and finance team is essential for the fifth step of reconciling sales commissions and revenue recognition. It is important to ensure that everyone understands how sales commissions and revenue recognition work, as well as the expectations and responsibilities of each party. You should communicate the accounting standards, the sales compensation plan, the commission software or tool, the commission calculations and reporting process, the commission accruals and adjustments process, and the commission disputes and resolutions process to your team. This communication can help prevent misunderstandings, confusion, and conflicts while fostering a collaborative and productive relationship.

6 Audit your commission and revenue data periodically

The sixth step to reconciling sales commissions and revenue recognition is to audit your commission and revenue data periodically. Auditing is a process of verifying and validating your data quality, accuracy, and completeness, and identifying and correcting any errors or discrepancies. Auditing can help you ensure that your commission and revenue data is compliant with the accounting standards, the sales compensation plan, and the internal controls. Auditing can also help you identify any gaps, risks, or opportunities for improvement in your commission and revenue processes. By auditing your commission and revenue data periodically, you can enhance your data integrity, reliability, and security.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?