By Jill Myhre, Stressfree Bookkeeping LLC
Do you own a business that accepts debit/credit card payments? Do your customers often add their tip to the credit card transaction? Are you recording these transactions correctly?
Many small businesses receive tips – restaurants, bars, salons, spas, etc. – that need to be paid to the employee that performed the work. Often the owner records these transactions as an expense because they see it as money going out of their business. If you record it as an expense it will show up on the P & L statement and you don’t want the P & L to be affected.
These transactions are called pass-through expenses. You want to record it on the balance sheet as a liability (owner has an obligation to pay out funds) and cash increased. When the money is paid out, the liability is reduced and cash is reduced. This only affects the balance sheet and never the P & L statement.