Journal Entry for Tips
Tip is the amount of money that customers pay to the employee in the service industry in addition to the price charged.
The customers consume the service provided by the seller, but the service is performed by the employees of the seller. The customers have the obligation to pay for the price of service to the seller. However, they end up paying more than the required amount. The customer pays tips to the employee as a reward due to their good service.
The tips are not required even it is expected in some countries which is the social norm that customer have to pay extra for a certain service. The customers’ main purposes are to reward the employees who are performing service for them. They wish to pay extra for them.
After receiving tips from customers, most companies will pay the tips to the employees based on their internal policy. It can separate equally to the employee or it can be base on a certain percentage that differentiates between the service provider and back office. For example, the service in the restaurant will depend on the waiter, chef, cashier, and so on. So the received tips will be shared equally amount these employees.
The company will be happy to receive the tips and payback to the employees. It is not the service price, it is the additional amount. It will encourage the employees to work harder and provide better service to customers. As a result, it will satisfy the customers and increase the sale as well as profit for the company.
The tips are usually received from customers to the company bank account through credit cards or other types of payment. The company cannot distribute cash to employees every day. They have to keep the cash in one account and pay employees on a monthly basis.
Journal Entry for Tips
The tips are mostly received alongside the price of service, but the company has to record them separately. Tip is not the company revenue even the customer paid for it. It is also not an expense even the company pays it back to the employees. When cash is received, company has to record cash and liability to the employees. The journal entry is debiting cash at bank and credit tip payable.
| Account | Debit | Credit |
|---|---|---|
| Cash at Bank | $$$ | |
| Tips Payable | $$$ |
The transaction will increase cash at bank. This amount will be present as tips payable which is the current liability on balance sheet.
When the company pays the tip to the employees, they have to reverse the tip payable from balance sheet. The journal entry is debiting tip payable and credit cash at bank.
| Account | Debit | Credit |
|---|---|---|
| Tips Payable | $$$ | |
| Cash at bank | $$$ |
The tip payable will be reversed at the month-end. It should be zero as the company makes payments to employees.
Example for Tips Journal Entry
ABC is a restaurant that sells different kinds of foods and beverages. During the month, the company has received tips of $ 5,000 in addition to the sales revenue. This tip amount is paid to the employees at the month-end. Please prepare journal entry for the tip.
Even the restaurant receives a tip into their bank account, it should not be recorded as revenue. It is the liability that the restaurant has to the employees. They have to record cash receive and tip payable. The journal entry is debiting cash at bank $ 5,000 and a credit tip payable $ 5,000.
| Account | Debit | Credit |
|---|---|---|
| Cash at Bank | 5,000 | |
| Tips Payable | 5,000 |
At the month-end, company makes a tip payments to the employee. The will reveres the tip payable and record cash paid out.
| Account | Debit | Credit |
|---|---|---|
| Tips Payable | 5,000 | |
| Cash at bank | 5,000 |