Error of Commission: Definition, Examples, and How To Avoid

Reviewing your financial records to discover accounting errors that are difficult to sort can be a challenging issue. One common issue that can cause these discrepancies is the error of commission, where financial transactions are recorded with mistakes in amounts, accounts, or other details. While the transaction type remains correct, the inaccuracies can still result in serious issues like underpayments, overpayments, or reporting errors. This article will help you ensure your financial records remain accurate and reliable by understanding this type of financial error.

What Is Error of Commission In Accounting?

In accounting, an error of commission definition refers to a mistake made while recording financial transactions, resulting in an inaccurate entry but still recording the transaction type in the correct category. This type of error occurs when an accountant or bookkeeper incorrectly records a transaction by entering an incorrect amount, account, or details without violating the transaction's general nature or categorization. This can involve recording the correct amount in the right account but posting it to the wrong ledger or entering the wrong amount in the correct account.

How To Find Commission Error

Commission errors are common mistakes in commission calculations, often seen in contexts like sales, finance, and trading. To detect these errors, you should follow these steps:

Review the transaction details and system inputs

Check all the transactions involved and confirm the correct rates and values have been applied. This includes validating the agreed-upon commission percentage or fee.

Review the data entry or software configurations to ensure they are correct. Often, commission errors stem from incorrect system configurations, such as wrong commission percentages, tax rates, or transaction amounts.

Compare commission amounts

Calculate the expected commission based on the transaction amounts and rates. Compare this calculated value to the amount actually charged or paid. Also, compare recent commission calculations to previous ones to spot any deviations in patterns or inconsistencies.

Audit the process

Look for patterns or systematic errors in how commissions are being calculated and paid. This might involve checking for issues in commission schedules, tax laws, or policy changes.

Error of Commission Examples

There are several scenarios and causes for an error of commissions. Here are  a few examples that will help you better understand:

Percentage Miscalculation Example

A salesperson is supposed to receive a 5% commission on a $1,000 sale. Instead of 5%, the salesperson's commission rate is mistakenly set at 4%.

Expected commission: 1000 × 5% = $50

Paid commission: 1000 × 4% = $40

The resulting error is that the salesperson is underpaid by $10.

Incorrect Transaction Amount Example

A real estate agent earns a 3% commission on a $500,000 sale. The system mistakenly records the sale amount as $400,000.

Expected commission: 500,000 × 3% = $15,000 

Paid commission: 400,000 × 3% = $12,000 

As a result, the agent is underpaid by $3,000 due to the wrong sale amount.

Tax or Fee Not Accounted For Example

A sales associate earns a 7% commission on a $500 sale, but taxes are not included in the commission calculation. The company mistakenly includes tax in the commission calculation, even though tax should not affect the commission.

Expected commission: 500 × 7% = %35 

Paid commission: (500 + 50 tax) × 7% = 38.5 

The salesperson is overpaid by $3.50 because the tax was included in the commission calculation.

Correct Amount, Right Account, but Wrong Ledger Example

A company sells office equipment for $1,200. The sales transaction should be recorded in the Sales Ledger under "Sales Revenue" for the correct amount ($1,200). However, the bookkeeper mistakenly posts the transaction to the Purchases Ledger instead of the Sales Ledger, even though the amount ($1,200) is correct, and the transaction belongs in the "Sales Revenue" category.

What is The Difference Between Error of Commission and Omission?

In accounting, maintaining accuracy is crucial for producing reliable financial records. However, mistakes are inevitable, and understanding the different types of errors is key to addressing them effectively. One common point of confusion is the distinction between error of commission vs omission. While both types of errors can lead to inaccuracies, they occur in different ways and have unique impacts on financial statements.

Key Differences Between Error of Omission and Commission

How To Correct Commission Error?

Once you’ve identified a commission error, your next step is to correct the error by following these steps:

1- Identify the source of the error

Determine whether the error is due to incorrect input, miscalculation, system malfunction, or human error.

2- Correct the calculation

If it's a simple miscalculation, recalculate the commission manually or using corrected formulas. Ensure the commission rate and the relevant transaction amount are accurate.

3- Adjust the records

If the error is identified after payments or accounting records are made, update the records to reflect the correct commission. This may involve issuing a corrected invoice or adjusting the payment.

Read Also: Adjusting Journal Entries: Definition, Types, and Examples

4- Communicate with the affected party

If the error affects a salesperson, partner, or client, communicate the correction and ensure that any overpayments or underpayments are handled.

Read Also: Transposition Error: Definition, Example, And How To Correct

How Can You Avoid Commission Errors?

To prevent commission errors, it's essential to establish robust processes and practices that ensure accuracy in commission calculations and payments. By taking proactive steps, businesses can minimize the risk of mistakes and maintain fairness in compensation. Below are some tips to consider to avoid these errors:

Set clear guidelines

Establish clear and thorough guidelines regarding commission structures, payment terms, and calculation methods. Ensure all parties are aware of these policies.

Automate commission calculations

Use reliable software or systems to automate commission calculations. This reduces human error and ensures consistency in calculations.

Double-check commission rates

Always verify that the commission rates, fees, and percentages are accurate before making any calculations or payments.

Implement internal checks

Have a system of checks and balances in place where multiple people review the calculations before finalizing payments.

Regularly monitor and audit

Perform regular audits and reviews to catch any issues early and ensure that commission calculations remain accurate.

How Can Enerpize Help You Avoid Commission Error

Enerpize, as an online accounting software, can significantly reduce the risk of commission errors through several powerful features developed to automate, streamline, and verify the commission calculation process.

• Automated Commission Calculations: Enerpize can automatically calculate commissions based on pre-set rules, ensuring consistency and accuracy in every transaction. By automating the process, it eliminates human errors that may occur with manual calculations.
• Customizable Commission Structures: The software allows you to set up customizable commission structures tailored to your business model, ensuring that commission rates, fees, and percentages are applied correctly to each sale or transaction. 
• Real-time Tracking and Reporting: Enerpize provides real-time tracking of commissions, so discrepancies can be spotted immediately. Reports can be easily accessed, making it easier to review and verify commission calculations regularly. 
• Audit Trails and Transparency: The software offers a transparent audit trail, making it easier to track and review past transactions and commission calculations for accuracy, which helps in identifying and correcting errors.