Manager's Commission

Sometimes, the manager is entitled for a commission on profits which is usually calculated at a fixed percentage of the profits. Suppose, the profit earned by the firm is Rs. 80, 000 without considering the commission which is at 5%. The commission will be then Rs. 4000. the profit will be reduced to Rs. 76,000. As the amount of commission Rs. 4,000 is still to be paid, it should be treated as an outstanding expense. Accordingly, the entry is:
Profit and Loss A/c Dr.
To Commission Payable or Outstanding commission A/c

Commission Payable A/c is a current liability and is shown in the Balance Sheet.

Sometimes, however, the commission is calculated on profits remaining finally after the commission. If the rate of the commission is 5%, and the profit remaining after the commission should be Rs. 100; then the profit before the commission should be Rs. 105. that is in this case, the commission of Rs. 5 should be out of every Rs. 105 of profit before the commission. The formula to calculate the commission in such a case is:

(Percentage of the commission/ 100+ percentage of the commission)* Net profit before charging the commission

If the Profit before commission is Rs. 80, 000 and the manager is entitled for a commission of 5% after deducting the commission, the amount will be Rs. 3, 810, ie., Rs. 80,000*5/105. This commission amount can be verified too. The profit after the commission is Rs. 76,190 and Rs. 3810 is 5% of this figure. One can see that to calculate it at 5% of Rs. 80, 000 will be wrong since Rs. 4000 is not 5% of Rs. 76,000.

Example 10 - The net profit of the firm amounts to Rs. 21, 000 before charging commission. The manager of the firm is entitled to a commission of 5% on the net profit. Calculate the commission payable to the manager under the following alternative cases:

Case 1 - if the manager is allowed commission on the net profit before charging such commission and
Case - if the manager is allowed commission on the net profit after charging such commission. Also show the treatment in the Final accounts.

Case 1 - Commission allowed on the net profit before charging such commission.
Commission = Net Profit before charging such commission*% of commission/100
= Rs. 21,000*5/100 = Rs. 1,050.
Case 2 = Commission allowed on the net profit after charging such commission
Commission = Net profit before charging such commission*% of commission/100+ % of commission
= Rs. 21,000*5/105 = Rs. 1,000

Profit and Loss Account

 Dr. Cr. Particulars Rs. Particulars Rs. To Manager's commission 1,000

Balance Sheet as at 31st March 2008

 Liabilities Rs. Assets Rs. Current Liabilities Manager's Commission Outstanding 1,000