ASC 940: Commission Revenue Recognition Journal Entries for Brokers and Dealers

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Accounting Standards Codification (ASC) Topic 940, "Financial Services - Brokers and Dealers," provides guidance on accounting for commission revenue recognition in the brokerage industry. Brokers and dealers generate commission revenue by executing securities transactions on behalf of clients, providing investment advice, or facilitating other financial services. Proper accounting for commission revenue recognition is essential to accurately reflect the financial position and performance of brokers and dealers. This article will explain the concept of commission revenue recognition transactions under ASC 940 and provide examples of journal entries that illustrate the proper accounting treatment for these transactions.

 

Commission Revenue Recognition Transaction

Under ASC 940, brokers and dealers recognize commission revenue when the following criteria are met:

 

  1. Persuasive evidence of an arrangement exists.
     

  2. The service has been rendered to the customer.
     

  3. The price of the transaction is fixed or determinable.
     

  4. Collectability is reasonably assured.

 

In most cases, brokers and dealers recognize commission revenue on a trade-date basis, which is the date on which the trade is executed. However, in certain circumstances, such as when the execution of the trade is contingent upon a future event, revenue recognition may be deferred until the contingency is resolved.

 

Journal Entries for Commission Revenue Recognition Transaction

To better understand the accounting treatment for commission revenue recognition transactions, let's look at a hypothetical example.

 

Example:

Brokerage Firm M executes a securities transaction on behalf of a client and earns a commission of $10,000.

 

Journal Entry 1: Record commission revenue

Assuming that all revenue recognition criteria are met, Brokerage Firm M would record the commission revenue as follows:

 

Debit: Accounts Receivable $10,000

Credit: Commission Revenue $10,000

 

The debit to accounts receivable represents the amount due from the client for the commission, while the credit to commission revenue recognizes the revenue earned by Brokerage Firm M.

 

Journal Entry 2: Record the receipt of cash

Once the client pays the commission, Brokerage Firm M would record the following journal entry:

 

Debit: Cash $10,000

Credit: Accounts Receivable $10,000

 

This entry records the receipt of cash from the client and clears the accounts receivable balance.
 

ASC 940 provides guidance on accounting for commission revenue recognition in the brokerage industry, ensuring that brokers and dealers accurately recognize revenue in accordance with the applicable criteria. By following the principles outlined in ASC 940, brokers and dealers can properly account for commission revenue recognition transactions and provide useful information to investors and other stakeholders. It is essential for accountants and financial professionals to understand and apply the principles of ASC 940 when dealing with commission revenue recognition transactions in the brokerage industry in order to maintain compliance with accounting standards and provide accurate financial information to stakeholders.