02 August 2025
Great question! Let me explain both parts clearly:
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### 1. Literal Meaning of **Traveller's Commission**
* **Traveller's Commission** generally refers to the **commission earned by a traveller or a traveling agent** who facilitates sales or business on behalf of a company. * In traditional business setups, a "traveller" is a **sales representative or agent** who travels to meet customers, promote products, and secure orders. * The **commission** is a percentage of the sales value or profit paid to this traveller as a reward for bringing business.
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### 2. Why is Traveller's Commission Distributed in Case of Pre and Post Incorporation?
When a company is formed (incorporated), the period before incorporation (pre-incorporation) and after incorporation (post-incorporation) are treated differently for accounting and taxation.
* **Pre-incorporation period:** Time before the company legally exists. Any business done, expenses incurred, or commissions earned during this period technically belong to the promoters or individuals, not the company.
* **Post-incorporation period:** Time after the company legally exists, when the company undertakes business officially.
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**Why distribute Traveller’s commission between pre and post incorporation in sales ratio?**
* If a traveller earns commission spanning both periods, it must be fairly **apportioned** or **allocated** between the pre-incorporation period and post-incorporation period. * This ensures that:
* Commission related to business done **before the company existed** is borne by promoters (or reflected as pre-incorporation expenses). * Commission related to business done **after incorporation** is borne by the company. * The **sales ratio method** means the commission is divided proportionally to sales achieved in each period (pre and post incorporation). For example:
* If 40% sales happened pre-incorporation and 60% post-incorporation, commission is allocated 40:60 respectively. * This is important for:
* Accurate financial reporting * Fair taxation and expense recognition * Avoiding disputes between promoters and company
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### Summary:
| Term | Explanation | | -------------------------- | --------------------------------------------------------------------- | | Traveller's Commission | Commission paid to sales agent or traveller who brings business | | Distribution of Commission | Allocating commission between pre/post incorporation periods | | Why distribution? | To fairly match expenses with respective business periods and parties | | How distributed? | Usually based on proportion of sales in each period (sales ratio) |
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If you want, I can help you with a simple working example or journal entries related to this! Would you like that?
CAclubindia
