I just received a question the other day that involved a salon. The owner of the salon received tips from customers on a credit card. Those tips are to be given to the stylist that performed the work. In the past the owner thought of these as a expense. However, they actually are not. The owner stated “it’s money going out, it has to be an expense”
These are what are called a pass-through expense and they should not show up on the P&L. The money coming in should be recorded on the balance sheet as a liability (owner has an obligation to pay out funds) and cash is increased. When you money is going out the liability is reduced and cash is reduced. Also both balance sheet accounts. The P&L is never effected in this transaction.
This works the same way for restaurants, bars or any business that receives tips from customers that get paid to employees.
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