Commission: Ordinary Commission, Del-credere Commission and over-riding commission, illustration on Commission

In consignment arrangements, the consignee receives a commission for selling goods on behalf of the consignor. Commission acts as an incentive for the consignee to promote and sell the consignor’s goods. Depending on the level of responsibility and risk assumed by the consignee, different types of commission may be paid, including Ordinary Commission, Del-credere Commission, and Overriding Commission.

Below is a detailed explanation of these three types of commissions, including their significance and illustrations to highlight their differences.

1. Ordinary Commission

Ordinary commission is the basic form of compensation paid to the consignee for selling goods on behalf of the consignor. It is usually a fixed percentage of the total sales value. The consignee earns this commission irrespective of the risk involved, as they only act as an intermediary in the selling process.

Characteristics:

• Paid based on the total sales made.
• No additional responsibility or risk is borne by the consignee.
• The consignee is not responsible for any default in payment by customers.
• It is the most common form of commission in consignment transactions.

Example:
If a consignor sends goods worth $50,000 to a consignee, and the consignee successfully sells all the goods, the consignor may offer an ordinary commission of 10% of the sales value. This means that the consignee will receive $5,000 as commission, regardless of any customer payment issues.

Accounting Entries:

• At the consignee’s end:
  • Debit: Commission Earned (Profit and Loss Account)
  • Credit: Consignor’s Account
• At the consignor’s end:
  • Debit: Commission Expense (Profit and Loss Account)
  • Credit: Consignee’s Account

2. Del-credere Commission

Del-credere commission is an additional commission paid to the consignee for taking on extra responsibility, particularly the risk of bad debts. Under a del-credere agreement, the consignee guarantees the payment for the goods sold, even if the customer defaults on payment. This added responsibility warrants a higher commission compared to ordinary commission.

Characteristics:

• Paid when the consignee guarantees collection of payment.
• The consignee takes on the risk of bad debts.
• Provides additional security to the consignor in terms of payment.
• The rate is higher than ordinary commission due to the added risk.

Example:
If a consignee sells goods worth $30,000, but the customer is unable to pay, the consignee must pay the consignor the full amount if a del-credere commission agreement is in place. If the agreed del-credere commission is 15%, the consignee earns $4,500 in commission but also absorbs the loss in case of non-payment from the customer.

Accounting Entries:

• At the consignee’s end:
  • Debit: Commission Earned (Profit and Loss Account)
  • Credit: Consignor’s Account

If customer defaults:

• • Debit: Bad Debts
  • Credit: Customer’s Account (but the consignee is still responsible for paying the consignor)
• At the consignor’s end:
  • Debit: Commission Expense (Profit and Loss Account)
  • Credit: Consignee’s Account

3. Overriding Commission

Overriding commission is an additional commission that is paid for special tasks or services provided by the consignee, beyond merely selling the goods. These tasks could include additional marketing, handling complex logistics, or securing special contracts. The overriding commission is typically paid in addition to the ordinary commission as compensation for the extra effort.

Characteristics:

• Paid for additional services or promotional efforts by the consignee.
• Usually higher than ordinary commission due to the extra tasks involved.
• May include efforts like marketing campaigns or expanding customer reach.
• Adds value for both the consignor and consignee by increasing sales potential.

Example:
Consider a consignor who sends goods to multiple regions, and the consignee is required to manage not just the sale but also a significant marketing campaign to promote the products. In this case, an overriding commission of 5% on top of the ordinary commission may be paid. If the goods are sold for $100,000, the consignee may receive $10,000 (ordinary commission of 10%) and an additional $5,000 (overriding commission of 5%).

Accounting Entries:

• At the consignee’s end:
  • Debit: Commission Earned (Profit and Loss Account)
  • Credit: Consignor’s Account
• At the consignor’s end:
  • Debit: Commission Expense (Profit and Loss Account)
  • Credit: Consignee’s Account

illustration of Commission

To better understand the practical application of these commission types, let’s consider a scenario where the consignee receives all three types of commissions:

Scenario:

• The consignor sends goods worth $50,000 to the consignee.
• The consignee successfully sells all the goods.
• The ordinary commission is 8%.
• The consignor has also agreed to pay an additional del-credere commission of 5% due to the risk of bad debts.
• Moreover, the consignee is entitled to an overriding commission of 3% for managing an extra marketing campaign.

Solution:

1. Ordinary Commission:

Ordinary commission = 8% of $50,000 = $4,000

2. Del-credere Commission:

Del-credere commission = 5% of $50,000 = $2,500

3. Overriding Commission:

Overriding commission = 3% of $50,000 = $1,500

Thus, the total commission the consignee earns in this transaction is: $4,000 (Ordinary) + $2,500 (Del-credere) + $1,500 (Overriding) = $8,000

Accounting Entries:

1. At the consignee’s end:
   • Debit: Commission Earned (Profit and Loss Account) = $8,000
   • Credit: Consignor’s Account = $8,000
2. At the consignor’s end:
   • Debit: Commission Expense (Profit and Loss Account) = $8,000
   • Credit: Consignee’s Account = $8,000

In this case, the consignee is compensated well for taking on additional risks and providing special services, while the consignor benefits from the consignee’s marketing and sales efforts.