What it means
ASC 340-40 covers the costs of winning and fulfilling customer contracts. For most startups that means sales commissions. If a cost exists only because a particular customer signed, and the contract's revenue will pay it back, you record it as an asset first and expense it gradually.
Recording a cost as an asset is called capitalizing it. Expensing it bit by bit over time is called amortization.
The test is whether you'd have paid the cost if the deal hadn't closed. A commission earned on signing passes. A rep's base salary doesn't, because you'd pay it either way.
The asset is amortized over the period the contract benefits you. Often that's the initial term. It can be longer when you expect the customer to renew and you won't pay a comparable commission on the renewal. If the period is a year or less, a practical expedient lets you expense the cost when it's incurred.
A rep closes a two-year contract and earns a $6,000 commission, payable next month. Acme expects the customer to stay all 24 months. When the commission is earned, Acme records a $6,000 deferred commissions asset and a $6,000 payable. The P&L doesn't move that day.
Next month Acme pays the rep, which clears the payable. Each month for 24 months, $250 moves from deferred commissions to commission expense. If the customer cancels after a year, the $3,000 still on the balance sheet is expensed then, because that contract can no longer pay it back.
It's the cost side of ASC 606: revenue is spread over the contract, and so is the commission that won it. The mechanics look like prepaids, and the deferred commissions schedule should tie to the ledger at each close.
Why it matters. Expense commissions as paid and a strong sales quarter can look like a loss, right when you're telling investors sales is working.
Try it with your numbers
Change any number. The working below updates as you type.
Monthly amortization = Commission ÷ Benefit period in monthsThe contract term, or longer if you expect renewals with no new commission.
Commission expense each month
$250.00
How it’s worked out
- 1Monthly amortization$6,000.00 ÷ 24$250.00
- 2Expensed to date12 months$3,000.00
- 3Still capitalized$6,000.00 − $3,000.00$3,000.00
| Month | Commission expense | Deferred commissions |
|---|---|---|
| Jan 2026 | $250.00 | $5,750.00 |
| Feb 2026 | $250.00 | $5,500.00 |
| Mar 2026 | $250.00 | $5,250.00 |
| Apr 2026 | $250.00 | $5,000.00 |
| May 2026 | $250.00 | $4,750.00 |
| Jun 2026 | $250.00 | $4,500.00 |
| Jul 2026 | $250.00 | $4,250.00 |
| Aug 2026 | $250.00 | $4,000.00 |
| Sep 2026 | $250.00 | $3,750.00 |
| Oct 2026 | $250.00 | $3,500.00 |
| Nov 2026 | $250.00 | $3,250.00 |
| Dec 2026 | $250.00 | $3,000.00 |
| Dec 2027 | $250.00 | $0.00 |
If the customer cancels after 12 months, the $3,000.00 still capitalized is expensed then. Showing the first 12 of 24 months and the last one.
The entry, worked
A rep earns a $6,000 commission for closing a two-year contract, payable next month. Acme expects the customer to stay 24 months.
| Account | Debit | Credit |
|---|---|---|
| Deferred commissions | $6,000.00 | |
| Commissions payable | $6,000.00 | |
| Total | $6,000.00 | $6,000.00 |
The commission becomes an asset, and $250 a month is expensed over 24 months alongside the revenue it helped win.
Common questions
Do I have to capitalize commissions on monthly contracts?
Not if the amortization period would be one year or less, since a practical expedient lets you expense those costs as incurred. Check the period first: if you expect a monthly customer to stay for years and pay no comparable commission on renewal, the period runs past a year and the expedient doesn't apply.
Do payroll taxes on commissions get capitalized too?
Often, yes, when they exist only because the commission was earned. It's a judgment call, so agree it with your CPA and put it in your policy.
Where do deferred commissions show up in the statements?
On the balance sheet, usually split between current, the part amortized in the next twelve months, and noncurrent. The amortization usually runs through sales and marketing expense.
Where it comes up
The glossary entries, founder guides and lessons on this site that use the term and link here.
Read further
General information for US companies, not tax, legal or accounting advice. Check the specifics with a CPA before you act on them.