Travel agents, introducers, marketplaces, sales agents and many brokers earn commission: a fee for arranging a sale between two other parties. The first accounting question is not how to post the commission but whether the business is really an agent at all.
Agent or principal?
Under FRS 102, a business is an agent when it does not take on the main risks of the sale: it does not control the goods or service before the customer receives it, does not carry stock risk and does not set the price. It then records only its commission as turnover. A principal records the full sale as turnover and the supplier’s cost as cost of sales.
| Indicator | Points to agent | Points to principal |
|---|---|---|
| Responsible to the customer for delivering the goods or service | no | yes |
| Holds stock or bears inventory risk | no | yes |
| Sets the selling price | no | yes |
| Paid a fixed fee or percentage | yes | no |
The same test matters for VAT, where agents acting in their own name are treated differently from agents acting in the principal’s name.
Accounts to use
- Commission income: within turnover.
- Commission receivable: for earned commission not yet paid by the principal.
- Client or principal money: a liability for amounts collected on behalf of the principal, if the business handles the cash.
Worked example
An agent sells a holiday for £3,000. The tour operator pays the agent 10% commission plus VAT.
| Account | Debit | Credit |
|---|---|---|
| Commission receivable | £360 | |
| Commission income | £300 | |
| Output VAT | £60 |
If the agent collected the £3,000 from the customer, the amount due to the operator is a liability, not income.
Timing and clawbacks
Commission is recognised when it is earned under the agreement, often when the underlying sale completes. If commission can be clawed back (for example if a customer cancels within a period), recognise only the amount that is not expected to be reversed and keep a provision for expected clawbacks based on history.
VAT
Commission for arranging a standard-rated supply is normally standard-rated. Some intermediary services, such as those relating to insurance or certain financial services, can be exempt, and arranging supplies outside the UK may be outside the scope. Check the treatment for your sector before invoicing.
For sales you make as principal, see service revenue in the chart of accounts; for amounts owed to you, trade debtors.