Collecting payments and fees for a direct sales company

Question

I'm a complete accounting novice, so please go easy on me if there is an obvious answer to this question.

There is a direct sales company that provides a 50/50 split on all sales. Transactions are handled by the sales reps who collect the full amount and then pass on 50% of the sale to the parent company (who ships the product to the customer). As an example, when a $100 item is sold, the sales rep will collect $100 from the customer and pass on $50 to the parent company, pocketing the rest. In this example, at no point was $50 of the transaction the property of the sales representative or their business. Should this still be accounted as a $100 of revenue with a $50 expense or could it simply be accounted for as $50 of revenue?

Cash transactions are easy to split like this, but if you use a merchant account like Square, they may issue a 1099-K at the end of the year showing ~50% more revenue then you actually made. So it seems like it should be accounted for as $100 of income with a $50 expense, but I'd like to confirm that this is the "correct" way to view the transaction.

Answer 1

I think you should keep track of the $100. That's what's sitting in your bank account, and it's going to be hard to reconcile if you just ignore half of it.

You could do something like this:

Asset:Bank Liability:DirectSalesCo Income:Commission Sale +$100 +$50 +$50 $100 $50 $50 Sale +$100 +$50 +$50 $200 $100 $100 Pay DSC -$100 -$100 $100 $0 $100

Answer 2

For the direct sales company:

Revenue $100

Cost of Sales $50

Gross Profit $50

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For the sales rep:

Revenue $50

Cost of Sales (Travelling Expenses, Communication Expenses, etc.)

EDIT:

The above is a very simplistic answer using only the information given in the question. Thanks to @RonJohn for pointing out that I should improve my answer.

The direct sales company is the company making sales of the item while the sales rep is providing a service of marketing and sales. Hence, as the price of the item is $100, that translates into $100 revenue for the direct sales company.

After that, the direct sales company, in effect, pays $50 to the sales rep for his service of selling said item. This translates into $50 expenses* for the direct sales company, and $50 revenue for the sales rep.

At no point in the accounting process does the sales rep account for $100 revenue as the sales of the item does not belong to the sales rep at all. Only his commission for the service provided, which is the act of marketing and selling.

Should the sales rep be interested in analyzing his "Statement of Profit and Loss", he should then calculate his Cost of Sales for any expenses incurred in the course of performing his duty of providing said marketing and selling service, to arrive at his profit figure.

*Note: Please take note that whether the expenses the direct sales company recognizes should be categorized into Cost of Sales or Marketing Expenses is debatable and dependent on the exact business activities of the company. Personally, I might place it into Marketing Expenses since I'd assume that there would be an actual cost to pay for procuring the item in the first place.