Journal entry for capitalized sales commissions
Illustrative company · Accrual basis · USD · March – April 2026
The worked example
A rep closes a three-year customer contract and is paid a $36,000 commission on March 15, 2026. The company expects the customer to stay for 36 months, so the commission is capitalized and amortized evenly from April 1, 2026: $1,000 a month.
Transaction · March 15, 2026
JE-1 15 Mar 2026 Manual posted
Pay the commission and capitalize it.
Read-onlyBalanced
Adjusting entry · April 30, 2026
JE-2 30 Apr 2026 Adjusting posted
Amortize the first month of the benefit period.
Read-onlyBalanced
Capitalized commission, amortized over the expected customer life
Computed by the same tested function the toolbelt runs. The last period absorbs any rounding, so the schedule sums to the cent.
| Month | Commission expense | Capitalized balance |
|---|---|---|
| Apr 2026 | 1,000.00 | 35,000.00 |
| May 2026 | 1,000.00 | 34,000.00 |
| Jun 2026 | 1,000.00 | 33,000.00 |
| Jul 2026 | 1,000.00 | 32,000.00 |
| Aug 2026 | 1,000.00 | 31,000.00 |
| Sep 2026 | 1,000.00 | 30,000.00 |
| Oct 2026 | 1,000.00 | 29,000.00 |
| Nov 2026 | 1,000.00 | 28,000.00 |
| Dec 2026 | 1,000.00 | 27,000.00 |
| Jan 2027 | 1,000.00 | 26,000.00 |
| Feb 2027 | 1,000.00 | 25,000.00 |
| Mar 2027 | 1,000.00 | 24,000.00 |
| Apr 2027 | 1,000.00 | 23,000.00 |
| May 2027 | 1,000.00 | 22,000.00 |
| Jun 2027 | 1,000.00 | 21,000.00 |
| Jul 2027 | 1,000.00 | 20,000.00 |
| Aug 2027 | 1,000.00 | 19,000.00 |
| Sep 2027 | 1,000.00 | 18,000.00 |
| Oct 2027 | 1,000.00 | 17,000.00 |
| Nov 2027 | 1,000.00 | 16,000.00 |
| Dec 2027 | 1,000.00 | 15,000.00 |
| Jan 2028 | 1,000.00 | 14,000.00 |
| Feb 2028 | 1,000.00 | 13,000.00 |
| Mar 2028 | 1,000.00 | 12,000.00 |
| Apr 2028 | 1,000.00 | 11,000.00 |
| May 2028 | 1,000.00 | 10,000.00 |
| Jun 2028 | 1,000.00 | 9,000.00 |
| Jul 2028 | 1,000.00 | 8,000.00 |
| Aug 2028 | 1,000.00 | 7,000.00 |
| Sep 2028 | 1,000.00 | 6,000.00 |
| Oct 2028 | 1,000.00 | 5,000.00 |
| Nov 2028 | 1,000.00 | 4,000.00 |
| Dec 2028 | 1,000.00 | 3,000.00 |
| Jan 2029 | 1,000.00 | 2,000.00 |
| Feb 2029 | 1,000.00 | 1,000.00 |
| Mar 2029 | 1,000.00 | 0.00 |
What the entries do to the accounts
Every entry above posted to the ledger, starting from zero balances: the net debit or credit each account is left with. Debits equal credits, so the books still balance.
| Account | Debit | Credit |
|---|---|---|
| 1000 Cash | 36,000 US Dollar | |
| 1750 Capitalized contract costs | 35,000 US Dollar | |
| 6050 Sales commission expense | 1,000 US Dollar | |
| Totals | 36,000 US Dollar | 36,000 US Dollar |
Why it is booked this way
A commission paid to win a multi-year contract buys something that lasts: the contract, and the revenue it brings. ASC 340-40 treats the incremental cost of obtaining a contract as an asset when the company expects to recover it, instead of an expense on the day it is paid. That is a GAAP rule, not a bookkeeping convention.
Each month of the benefit period moves an equal share from the balance sheet to the P&L, so the commission lands in the same months as the revenue it helped win. The schedule is the control: the asset on the balance sheet must equal the unamortized balance on it.
Capitalizing is judgment, so write the policy down: which costs qualify, the amortization period and how it is reviewed. An auditor will ask for it, and a due-diligence team will test it.
Common mistakes
- Expensing every commission when it is paid, so the quarter a rep closes a big deal carries the whole cost and the quarters that earn the revenue carry none.
- Capitalizing commissions that are not incremental, such as base salary or a bonus that depends on company results.
- Amortizing over the contract term when renewals are expected and the renewal commission is much smaller.
Questions
- Which commissions are capitalized?
- Only the incremental cost of obtaining the contract: the commission that would not exist if the deal had not been signed. Salaries, base pay, and bonuses that depend on other things are expensed as incurred.
- Do I have to capitalize every commission?
- No. ASC 340-40 allows a practical expedient: if the amortization period would be one year or less, the commission can be expensed when incurred. It is an election you apply consistently.
- What period do I amortize over?
- Over the period the commission benefits, which can be longer than the first contract term when renewals are expected and a renewal commission is not commensurate with the first. Write down how you chose it.
Terms on this page
The lessons that teach this
From the free founder back-office course: each lesson is taught on one company's books, with the authority behind every rule.
- Adjusting entriesFive entries nobody sends an invoice for, made on the last day of the month, that turn a list of transactions into a set of accounts.11 min
- Prepaid and accrual schedulesLesson 9's adjustments, run forward: the insurance released to zero, a mid-month prepaid on two conventions, and September's power accrual reversed and trued up when the bill arrives.13 min
- Fixed assets and depreciationA capitalization policy, two October purchases on either side of it, the van's schedule over its whole life, and what selling it does to the books.9 min
Work with this entry
The tool that computes the schedule, the concept behind it, the entries that come next and the components that render them.
- Prepaid & deferred releaseRelease a prepaid or deferred balance evenly or by days in each month. Put your own figures in and get the schedule behind this entry.
- Contract costs, explained for foundersASC 340-40 capitalizes sales commissions and other costs of winning a contract, then expenses them over the period the contract benefits you.
- Journal entry for a prepaid software subscriptionWhen an annual software subscription is paid up front, debit Prepaid software and credit Cash (or Accounts payable). Each month-end, debit Software expense and credit Prepaid software for the days of service used that month.
- Journal entry for deferred revenueWhen an annual contract is invoiced up front, debit Accounts receivable and credit Deferred revenue. As each month of service is delivered, debit Deferred revenue and credit Revenue for that month's share.
- Journal entry for a bundled contract under ASC 606For a contract with several promises, debit Accounts receivable and credit Deferred revenue for the price when billed, allocate the price to each performance obligation by relative standalone selling price, and credit Revenue for each part as that promise is satisfied.
- ScheduleTableOne shell, seven presets. Prepaids through debt.
- JournalEntryDebit and credit as two columns. No signed-column variant.
An illustrative company, not anyone’s real books. Every figure on this page is computed from the inputs in the example and posted by the same functions as the journal entry balancer. General information, not tax, legal or accounting advice. Check with a CPA before you act on it.