Accrued tips, like sales tax, is complicated because the account is affected by multiple activities such as sales transactions and payroll transactions.
Keep This in Mind
Tips collected are not revenue and tips paid is not an expense.
The flow of tip transactions is simply a passthrough. Your business is collecting tips on behalf of the employee and then remitting them to the employee on the next pay run, so the business is merely a middle man.
How It Works
Tips are collected every day and, in most cases, entered into the point-of-sale (POS) system. If the tip is paid with a credit card, it will be included in POS reports. Tips collected are reflected on the balance sheet as an increase in Accrued Tips.
A sample POS report may reflect a single day’s sale activity like so:
Example 1A: Sample POS Report
|Payment Type: Cash||$100|
|Payment Type: AMEX||$700|
|Payment Type: Visa/Mastercard||$930|
This report indicates that on this day, $200 worth of tips were collected. We don’t have a breakdown of how those tips were processed (Visa, AMEX, Cash, etc), but for simplicity sake, we will assume all tips paid were processed on a Visa credit card.
To reflect this collection of tips for the day, the journal entry would be posted accurately as so:
Example 1B: Example Journal Entry
|Undeposited Merchant Collections||$200||Dollar value of tips collected, but not yet received in the operating account|
|Accrued Tips||$200||Dollar value of tips collected that will be paid to employees during the next payrun|
When the next payroll date comes around, tips collected during the pay period will be paid to employees.
Example 2A: Example Payroll Report
|Employee Payroll Taxes||$5,018.07|
|Employer Payroll Taxes||$1,937.50|
|Employee Benefit Deductions - Health||$733.62|
|Net Pay - Direct Deposits||$17,080.28|
|Net Pay - Checks||$2,856.74|
This shows how much was paid to employees related to tips in a given pay period. The journal entry solely related to tips would then look like this:
Example 2B: Example Journal Entry
|Accrued Tips||$3,215.55||Dollar value of tips paid to employees as part of this pay period|
|Payroll Clearing||$3,215.55||A portion of the dollar value that will be pulled from the operating account as part of the total payroll pull for the period|
The accrued tips account is simply a flow-through account. As your business collects tips, the dollar value of this account will increase. After each payrun, the dollar value of this account will decrease due to tips being paid out to employees.