Commission Received In Advance Effect On Accounting Equation

When you received commission in advance then it represents a Current Liability for your business to render services to the company paid commission in advance to your company.

In such case two accounts are involved. One is Commission Received In Advance (CRA) and other one is cash account. CRA is a current liability which is increasing so it affects the liability & equity side (right side) of the Accounting Equation (AE). Cash is also increasing which increases the assets side (left side) of accounting equation.

For example, a company received commission of $1,000 from company B for performing the uncompleted portion of the project. Show the effect of this transaction on Accounting Equation.

This is a Business Transaction in which two parties are involved i.e., Company A and Company B. Company A is received commission from Company against the services yet to be performed.

From the point view of business of Company A, cash is increasing by $1,000 as it is coming into the business (cash inflow) while liability is also increasing by $1,000 as the Company is still not earned revenue against the commission received in advance. So, in accounting journal entry, we debit cash account of $1,000 as it is increasing and credit Commission Received In Advance Account (Or Unearned Commission) as it is increasing according to Rules of Debits and Credits.

The effect of this business transaction, shown in the example, on the accounting equation is as shown below:

Assets      =                   Liabilities                                 +  Equity

+Cash       =   +Commission Received In Advance    +      -

+$1,000    =                  +$1,000                                     +      -

From the above accounting equation, it is clear that assets increased by $1,000 due to increase in Cash of $1,000 while liabilities & equity side also increased by $1,000 due to increase in Commission Received In Advance of $1,000 and as a result both sides of AE remain in balance.