Accountancy · Ch 10 — Financial Statements - II
Manager's Commission
Manager's Commission
Manager’s Commission
A manager is sometimes entitled to a commission based on the net profit of the business. This is a reward for performance and is treated as an expense of the business. The commission is calculated as a percentage of the net profit, and the key question is whether that percentage is applied to the profit before charging the commission or after charging the commission.
Two Bases for Calculation
The percentage can be applied in two ways:
- On profit before charging commission — the commission is calculated on the net profit figure that exists before the commission itself is deducted.
- On profit after charging commission — the commission is calculated on the net profit that remains after the commission has been deducted.
In the absence of any specific information, the default assumption is that the commission is a percentage of the net profit before charging such commission.
Calculation Formulas
Suppose the net profit of a business is ₹110 before charging commission, and the manager is entitled to 10% commission.
Case 1: Commission on profit before charging commission
The calculation is straightforward:
Commission = Profit before commission × Rate of commission
For the example: ₹110 × 10% = ₹11
Case 2: Commission on profit after charging commission
Here the commission is a percentage of the profit that remains after the commission itself is deducted. The formula used is:
Commission = (Profit before commission × Rate of commission) / (100 + Rate of commission)
For the example: (₹110 × 10) / (100 + 10) = ₹1100 / 110 = ₹10
Notice that the commission is lower in the second case because the base (profit after commission) is smaller than the base (profit before commission).
Accounting Treatment
The manager's commission is an expense of the business. The journal entry to record it is:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Profit and Loss A/c Dr. | [Amount] | |||
| To Manager’s Commission A/c | [Amount] |
The Profit and Loss account is debited because the commission is a charge against profit — it reduces the net profit that belongs to the owner. The Manager’s Commission account is credited, and since it remains unpaid at the year-end, it appears as a current liability (outstanding expense) in the Balance Sheet.
Worked Example: Ankit’s Books
The textbook illustrates both methods using Ankit’s accounts. The manager is entitled to a 10% commission. The net profit before charging any commission is ₹20,623 (this figure is derived from the full Trading and Profit and Loss Account before the commission line is inserted).
(i) Commission on Profit Before Charging Commission
Commission = ₹20,623 × 10% = ₹2,062 (rounded)
The Profit and Loss Account shows this commission as an expense, and the net profit transferred to capital is reduced accordingly.
Trading and Profit and Loss Account of Ankit for the year ended March 31, 2017
| Expenses/Losses | Amount (₹) | Revenues/Gains | Amount (₹) | ||
|---|---|---|---|---|---|
| Purchases | 75,000 | Sales | 1,25,000 | ||
| Wages | 8,000 | Closing stock | 15,000 | ||
| Add Outstanding wages | 500 | 8,500 | |||
| Gross profit c/d | 56,500 | ||||
| 1,40,000 | 1,40,000 | ||||
| Salaries | 25,000 | Gross profit b/d | 56,500 | ||
| Less Prepaid salary | (5,000) | 20,000 | Commission received | 5,000 | |
| Rent of building | 13,000 | Add Accrued commission | 1,500 | 6,500 | |
| Depreciation – Furniture | 1,500 | ||||
| Bad debts | 4,500 | ||||
| Add Further bad debts | 2,500 | 7,000 | |||
| Provision for doubtful debts | 650 | ||||
| Provision for discount on debtors | 227 | ||||
| Manager’s commission | 2,062 | ||||
| Net profit (transferred to Ankit’s capital account) | 18,561 | ||||
| 63,000 | 63,000 |
Balance Sheet of Ankit as at March 31, 2017
| Liabilities | (₹) | Amount (₹) | Assets | (₹) | Amount (₹) |
|---|---|---|---|---|---|
| Owners Funds | Non-Current Assets | ||||
| Capital | 12,000 | Furniture | 15,000 | ||
| Add Net profit | 18,561 | 30,561 | Less Depreciation | (1,500) | 13,500 |
| Non-Current Liabilities | Current Assets | ||||
| Long-term loan | 5,000 | Debtors | 15,500 | ||
| Current Liabilities and Provisions | Less Further bad debts | (2,500) | 13,000 | ||
| Creditors | 15,000 | Less Provision for doubtful debts | (650) | 12,350 | |
| Outstanding wages | 500 | Less Provision for discount on debtors | (227) | 12,123 | |
| Rent received in advance | 3,000 | Prepaid salary | 5,000 | ||
| Manager’s commission outstanding | 2,062 | Accrued commission | 1,500 | ||
| Bank | 5,000 | ||||
| Cash | 4,000 | ||||
| Closing stock | 15,000 | ||||
| 56,123 | 56,123 |
(ii) Commission on Profit After Charging Commission
Commission = (₹20,623 × 10) / (100 + 10) = ₹2,06,230 / 110 = ₹1,875 (rounded)
The net profit transferred to capital is now ₹18,748, which is higher than in the first case because the commission itself is lower.
Trading and Profit and Loss Account of Ankit for the year ended March 31, 2017
| Expenses/Losses | Amount (₹) | Revenues/Gains | Amount (₹) | ||
|---|---|---|---|---|---|
| Purchases | 75,000 | Sales | 1,25,000 | ||
| Wages | 8,000 | Closing stock | 15,000 | ||
| Add Outstanding wages | 500 | 8,500 | |||
| Gross profit c/d | 56,500 | ||||
| 1,40,000 | 1,40,000 | ||||
| Salaries | 25,000 | Gross profit b/d | 56,500 | ||
| Less Prepaid salary | (5,000) | 20,000 | Commission received | 5,000 | |
| Rent of building | 13,000 | Add Accrued commission | 1,500 | 6,500 | |
| Depreciation – Furniture | 1,500 | ||||
| Bad debts | 4,500 | ||||
| Add Further bad debts | 2,500 | 7,000 | |||
| Provision for doubtful debts | 650 | ||||
| Provision for discount on debtors | 227 | ||||
| Manager’s commission | 1,875 | ||||
| Net profit (transferred to Ankit’s capital account) | 18,748 | ||||
| 63,000 | 63,000 |
Balance Sheet of Ankit as at March 31, 2017
| Liabilities | (₹) | Amount (₹) | Assets | (₹) | Amount (₹) |
|---|---|---|---|---|---|
| Owners Funds | Non-Current Assets | ||||
| Capital | 12,000 | Furniture | 15,000 | ||
| Add Net profit | 18,748 | 30,748 | Less Depreciation | (1,500) | 13,500 |
| Non-Current Liabilities | Current Assets | ||||
| Long-term loan | 5,000 | Debtors | 15,500 |