Accounting Principles – Selling Expenses

The office expenses will consist of the salaries of the sales manager and clerks as well as the miscellaneous office expenses. The expenses of the salesmen will include salaries, traveling and commissions. There is nothing especially peculiar concerning the salaries of the sales manager and clerks. At times, the amount chargeable to the salary of the sales manager is a part of the salary of some officer of the company whose time is in part devoted to selling and the management of the sales department. Neither do the salaries of the salesmen call for any particular comment. Traveling expenses will include all expenses from the time the salesman leaves the office until he returns from his trip. Most concerns require detailed expense reports from their salesmen, classifying the expenses into traveling, subsistence and miscellaneous. Traveling includes the car or taxicab which takes the salesman from the office to the train, his railroad fare to point of destination, including Pullman and meals on the train; also the cab or car from the station at destination to the hotel. Subsistence covers his board and lodging at the hotel, while miscellaneous expenses cover items like stationery, telegrams, etc. It is quite the custom to advance funds to salesmen for traveling expenses, the funds to be accounted for either monthly, or at the end of each trip if the traveling is not continuous. Where a salesman is constantly on the road, the fund is carried the same as the ordinary working fund. He will be advanced a sufficient amount to cover his expenses for the month, for example. At the end of each month he sends in his expense report, and receives in return a check in the same amount. Thus, on the books of the general office he will at all times be charged with the amount of his fund.

A salesman may receive not only salary but commission for his services. In some cases, salesmen work entirely on commissions. In both these cases a somewhat unique question frequently presents itself. To illustrate the point, take, for example, the straw hats which will be sold by retailers during the coming spring and summer. These same goods were probably sold by salesmen representing wholesalers who were on the road, completed their sales, received their salaries, traveling expenses and commissions prior to December 31. The question which arises is this: “Is it proper to charge such expenses against one year, although contracts for delivery are made in that year, when the actual delivery of the goods will not be made and sales recorded until the subsequent year?” Theoretically, it is not correct to do so, for the reason that while legally the sale was made during one year the sales were not recorded as such, in so far as the operations of the business are concerned, until a subsequent year. Theoretically, the income of the subsequent year profited by the sales. It would also seem, as a matter of justice, that it should be charged with the expenses attending these sales. Cases have been known where concerns attempted to suspend salaries and expenses of salesmen and apply them against the period in which the sales were recorded. In the majority of cases, however, it is held that one period will offset another, or that the matter will be evened up in the long run, and it is generally a waste of time and effort to carry these items in suspense and apply them properly.

Commissions are usually computed on sales prices. In some cases they are credited to the salesman’s drawing account, against which advances are charged. It becomes necessary in some cases to keep elaborate records of commissions, because of the tendency on the part of salesmen to put through orders which are not bona fide, and in that way attempt to collect larger commissions than they are entitled to. Concerns which have commission contracts with their salesmen are put to no end of trouble many times through returns and cancellations. Most concerns pay commissions to salesmen only on sales which materialize, or, in other words, net sales. Real estate concerns and insurance companies which employ salesmen and agents especially require elaborate books and records dealing with commissions. The subject of agents’ commissions in the insurance line is sufficient for a small book in itself. It may be mentioned, in passing, that the principal distinction to be borne in mind by insurance companies is the payment of commissions on first-year premiums and renewal premiums. The rate differs on the two classes of premiums, being much greater in the case of first-year than in the case of renewals. It is, therefore, important that the company distinguish between the two.

Advertising is one of the most important items in this group. Advertising may embrace several different forms, namely, the display of advertisements in newspapers and magazines, the display of advertisements on billboards, circular letters, souvenirs, etc. It was also suggested to the author on one occasion that the cost of a sign be charged to advertising. To this no»particular exception could be taken. Surely no one would object to charging the expense of operating an electric sign to advertising, and the question of charging the cost of the sign would, in either case, not be whether or not it was approximately chargeable to advertising, but as to whether or not it was desired to capitalize an item of such considerable cost. A well-known department store, which maintains an auditorium and an entertainment daily for its patrons, charges, it is understood, the expense of conducting this feature of the store to advertising. Any legitimate expense having to do directly with advertising may properly be charged to the advertising account. The account has, however, in some instances, become a general dumping-ground for miscellaneous items—not excepting rebates. One instance is recalled in which a small concern, doing practically no direct advertising, had an expense account for advertising (rebates) running into thousands of dollars. While this procedure was not illegal at the time it occurred, it was not justified. The proprietor attempted to justify it on the theory that this was one means of attracting customers. The fallacy of such theory will be apparent after a moment’s thought.

The question of vital importance with regard to advertising is, first, whether or not it is prepaid; and second, if prepaid, in what manner and at what rate is it used? A concern engaged in circularizing would not be warranted, according to the best accounting practice, in charging immediately to expense the cost of printing 250,000 circular letters and envelopes. It would be proper, rather, to charge these letters and envelopes to expense approximately as used. The rule is to charge advertising, not to the period in which it is contracted for, or paid for, but to the period in which it is used. Thus, an organization contracting for $30,000 worth of advertising for a given year would not charge the entire $30,000 to expense immediately, nor at the time of paying for the advertising, but at the rate of $2,500 a month, if the advertising were to be spread over a period of a year. The value of prepaid advertising, in the case of enforced realization and liquidation, will depend upon the arrangements which can be made with the advertising media or agents.

The accounts representing the items making up this group are closed into the account, “selling expenses,” which account corresponds to the third section of the statement of income and profit and loss, as follows:
Sales department expenses:

Salary, sales manager $2,000.00
Salaries of clerks 1,500.00
Office expenses 500.00
Salesmen:
Salaries 1,000.00
Traveling 1.000.00
Commissions 1,000.00
Advertising 2,500.00
Entertainment of customers 500.00
Total traveling expenses $10,000.00