Quick Summary
- Commission is the reward agents receive for selling or buying goods for others
- Ordinary agents earn simple commission based on sales value
- Del credere agents earn higher commission because they guarantee payment
- Commission is an expense for the principal and income for the agent
- Calculated as: Commission = Sales (or Purchases) × Commission Rate
Understanding Agent’s Commission
What Is an Agent?
An agent is a person or business that acts on behalf of another person (called the principal) to buy or sell goods. The agent does not own the goods but helps to complete transactions. In return, the agent receives a payment called commission.
Think of how Jumia or Konga marketplace works. Many sellers use these platforms as agents to reach customers. The platform takes a percentage of each sale as commission. Similarly, real estate agents in Lagos help people buy or rent houses and earn commission from successful deals.
What Is Commission?
Commission is the fee paid to an agent for services provided. It is usually calculated as a percentage of the total value of goods sold or purchased. For example, if an agent sells goods worth ₦500,000 and the commission rate is 5%, the agent earns ₦25,000.
Formula:
Commission = Total Sales (or Purchases) × Commission Rate (%)
Commission serves several purposes:
- Motivates agents to sell more goods
- Rewards agents for their effort and expertise
- Reduces risk for principals (pay only when sales happen)
- Helps businesses expand to new markets through local agents
Types of Agents and Their Commission
1. Ordinary Agent
An ordinary agent sells goods on behalf of the principal and earns a simple commission. The ordinary agent does NOT take responsibility if customers fail to pay. If a customer buys on credit and later refuses to pay, the loss falls on the principal, not the agent.
Example: Chidi is an ordinary agent for a beverage company in Enugu. He sells drinks worth ₦800,000 in one month. His commission rate is 4%.
Commission = ₦800,000 × 4/100 = ₦32,000
Chidi receives ₦32,000 as his reward. If any customer fails to pay for drinks purchased on credit, Chidi is not responsible. The beverage company bears that loss.
Characteristics of ordinary agents:
- Earn lower commission rates (typically 2-5%)
- Do not guarantee customer payments
- Less risk for the agent
- Principal bears bad debt risk
- Most common type in Nigerian markets
2. Del Credere Agent
A del credere agent also sells goods for the principal but takes on extra responsibility. This agent GUARANTEES that customers will pay for goods purchased. If a customer fails to pay (becomes a bad debt), the del credere agent must pay the principal from his own pocket.
Because of this extra risk, del credere agents earn higher commission than ordinary agents. The additional commission paid for this guarantee is called del credere commission.
Example: Ngozi is a del credere agent for a textile company in Kano. She sells fabrics worth ₦1,000,000. Her ordinary commission is 5%, and her del credere commission is an additional 2%.
Ordinary Commission = ₦1,000,000 × 5/100 = ₦50,000 Del Credere Commission = ₦1,000,000 × 2/100 = ₦20,000 Total Commission = ₦50,000 + ₦20,000 = ₦70,000
Ngozi receives ₦70,000. However, if any customer she sold to fails to pay, Ngozi must refund that amount to the textile company.
Characteristics of del credere agents:
- Earn higher commission rates (typically 6-10% total)
- Guarantee payment from all customers
- Higher risk for the agent
- Principal has security against bad debts
- Common in wholesale and export businesses
Comparison Table
| Feature | Ordinary Agent | Del Credere Agent |
|---|---|---|
| Commission Rate | Lower (2-5%) | Higher (6-10% total) |
| Payment Guarantee | No guarantee | Guarantees customer payment |
| Risk Level | Low risk | High risk |
| Bad Debt Responsibility | Principal bears loss | Agent bears loss |
| Commission Type | Simple commission only | Ordinary + Del credere commission |
| Principal’s Security | No payment security | Full payment guaranteed |
| Common Use | Retail sales, local markets | Wholesale, export businesses |
| Example | Local distributor for soft drinks | Export agent selling Nigerian goods abroad |
Accounting Treatment of Commission
In the Principal’s Books
Commission is an expense for the principal. It reduces profit.
Journal Entry:
Dr. Commission Expense Account
Cr. Agent's Account (or Cash/Bank)
Example: You pay ₦45,000 commission to your agent Musa.
Dr. Commission Expense ₦45,000
Cr. Musa's Account ₦45,000
In the Profit and Loss Account, commission appears on the debit side as an expense:
Profit and Loss Account
₦
Expenses:
Salaries 120,000
Commission 45,000
Rent 60,000
In the Agent’s Books
Commission is income for the agent. It increases profit.
Journal Entry:
Dr. Principal's Account (or Cash/Bank)
Cr. Commission Income Account
Example: Agent Musa receives ₦45,000 commission.
Dr. Cash/Bank Account ₦45,000
Cr. Commission Income ₦45,000
In the Profit and Loss Account, commission appears on the credit side as income:
Profit and Loss Account
₦
Income:
Commission Income 45,000
Discount Received 12,000
Other Commission Variations
Overriding Commission
This is extra commission paid to senior agents or supervisors who oversee other agents. It is calculated on the total sales of all agents under their supervision.
Example: A regional manager supervises 5 agents who sold ₦2,000,000 combined. The overriding commission is 1%.
Overriding Commission = ₦2,000,000 × 1/100 = ₦20,000
Special Commission
Sometimes principals offer bonus commission when agents exceed sales targets. This motivates agents to sell more.
Example: Normal commission is 4%, but if an agent sells above ₦1,000,000 in a month, they get an extra 1% on sales above that amount.
Common Exam Mistakes
Based on WAEC Chief Examiner reports, students frequently make these errors:
- Confusing the two agent types: Many students cannot explain the difference between ordinary and del credere agents. Remember: DEL CREDERE = DEBT GUARANTEE. The agent guarantees debts will be paid.
- Wrong commission calculation: Students forget to convert percentages properly. Always divide by 100 or multiply by the decimal equivalent. 5% = 5/100 = 0.05.
- Treating commission as income for the principal: Commission is ALWAYS an expense for the principal (the person paying it) and income for the agent (the person receiving it). Never reverse this.
- Adding instead of showing two separate rates: For del credere agents, show BOTH the ordinary commission and del credere commission separately before adding. Don’t just give one final rate.
- Poor explanation of del credere: Students write “higher commission” without explaining WHY it is higher. Always mention the bad debt guarantee as the reason.
- Forgetting to calculate total commission: When given both ordinary and del credere rates, students calculate only one. Always calculate both and add them together for the total.
Practice Questions
Multiple Choice Questions
1. An agent who guarantees payment from customers is called:
a) Ordinary agent
b) Del credere agent ✓
c) General agent
d) Special agent
2. Commission is treated as __________ in the principal’s books:
a) An asset
b) A liability
c) An expense ✓
d) Income
3. If an agent sells goods worth ₦400,000 at 5% commission, the commission earned is:
a) ₦5,000
b) ₦10,000
c) ₦20,000 ✓
d) ₦40,000
4. Who bears the loss when a customer fails to pay an ordinary agent’s sales?
a) The agent
b) The customer
c) The principal ✓
d) The bank
Essay/Theory Questions
1. Explain the difference between an ordinary agent and a del credere agent, stating THREE points of difference. (9 marks)
Tip: Define both types clearly. Then compare commission rates, risk levels, and responsibility for bad debts. Use examples to show understanding.
2. State FOUR reasons why principals use agents to sell their goods. (8 marks)
Tip: Think about market expansion, local knowledge, reduced costs, and risk sharing. Explain each reason with at least one supporting sentence.
3. Adamu is a del credere agent for Sokoto Textiles Ltd. In March 2024, he sold goods worth ₦1,500,000. His ordinary commission is 4% and del credere commission is 2.5%.
Required:
(a) Calculate Adamu’s total commission for March. (4 marks)
(b) Show the journal entry in Adamu’s books to record the commission. (4 marks)
(c) Explain why Adamu receives higher commission than an ordinary agent. (4 marks)
Tip for (a): Calculate ordinary commission first, then del credere commission, then add both. For (b): Remember commission is income for the agent. For (c): Explain the bad debt guarantee clearly.
Memory Aids
Mnemonic for Del Credere: “DEL = DEBT, CREDERE = GUARANTEE”
Del credere agents guarantee that debts (money owed) will be paid. They carry the credit risk.
Commission Formula Reminder: “SCRAP”
- Sales × Commission Rate = Agent’s Payment
Accounting Treatment Memory Aid:
“PEAI” – Principal = Expense, Agent = Income
The Principal treats commission as an Expense. The Agent treats it as Income.
Type Comparison: “ORDINARY = LOW, DEL CREDERE = HIGH”
Ordinary agents have LOW commission and LOW risk. Del credere agents have HIGH commission and HIGH risk.
Related Topics
- Consignment – How agents receive goods to sell
- Profit and Loss Account – Where commission appears as expense or income
- Bad Debts – Understanding uncollectible amounts
- Types of Agents – Broader view of agency in commerce
- Discount Allowed – Another expense similar to commission