Financial accounting, the necessary recording of business transactions, is crucial to tracking your earnings and performance. Accounting is also an important part of accurately reporting your income for taxes. HMRC expects you to maintain these financial records for about six years. 

So, if you’re self-employed and often earn tips from customers, you’ll need to include these in your financial records. Still, you may wonder how to record tips in accounting. Luckily, we’re here to help. 

This guide will cover how to record tips in accounting, including: 

  • What counts as a tip  
  • How to calculate and record tips 
  • How to organise your finances to track tips
  • How accounting software can help 

What counts as a tip

A tip is any additional money a customer gives you that goes beyond what they owe your business. For example, if a customer buys a coffee from your shop for £2 and leaves 50p extra, that’s a tip. If your small business is in hospitality, food, entertainment, or labour, you may be more likely to receive tips for your services. 

In the restaurant industry, tipping is separate from compulsory service charges. A service charge is included in the sale cost and added to the bill automatically, while a tip is an additional revenue. Though you don’t anticipate tips in your sales prices, you’ll need to include them in your financial records and overall business earnings. You must record tips because they are subject to income tax and potentially national insurance, like all other income.

Sometimes these tips will be easier to track. For example, if you have a tip jar by your register, you need only count them at the end of the day and record them. But if a customer tells you to ‘keep the change’ or adds a tip to card payment, it may not be as easy to record in your financial accounting. 

How to calculate and record tips

Once you understand what counts as a tip in your financial records, it’s easier to know how to record tips in accounting when you run your own business. 

Differentiating cash vs card tips

Depending on your business and how you accept payments, you may receive tips in different forms. If you mainly receive tips in cash, it can be easier to track and record these regularly. Just separate the cash you earn as a tip and count it at the end of the day. 

Additionally, you could accept card payments with a system that allows customers to add a tip electronically. In this case, as you earn tips, you’ll need to find these transactions and include them in your bookkeeping

You may earn tips both in cash and electronically. The combination can be more challenging to keep up with as the money won’t be all in one place. But, with the right tip tracking process, you can stay on top of recording these tips.   

Coming up with a system 

Once you get an idea of how you usually receive tips, you can create a system around tracking and recording them. Be sure to add each tip to your bookkeeping records and label these transactions clearly, noting whether you received them by card or cash. Also, regularly deposit cash tips into your bank account. 

To maintain accuracy, be sure to update your tip records regularly. Try calculating at the end of each working day and checking over these numbers at the end of the week. Depending how often you get tipped, you may want to record them individually or as a daily sum. Just be careful not to duplicate them in your records. 

If you receive cash and card tips, check both sources for potential tips. If a customer tells you to keep the change of a larger bill, consider setting aside that extra amount in cash or making a note of it to add to your records. 

You can learn about organising records from our guide on tips for self-employed bookkeeping.  

Reporting tips with your income 

While you create important financial statements for your tax reports, such as your income statement, you will need to look back at your records and include tips. For example, if you earn £5,000 from sales one month and £200 in tips, that adds up to £5,200 in revenue. This number will help determine your annual income and, as a result, the taxes you owe.  

You’ll need to report these tips to the HMRC, and the process could be different depending on your business. As a self-employed person, you likely report your own taxes by completing a Self Assessment tax return, and you can add the tips to this.

You can also report tips by calling the HMRC or adding them to a personal tax account. You can learn more about how to report them here.  

How to organise your finances to track tips 

Keeping accurate records of your transactions, including tips, requires strong financial organisation. The first step to organising your business finances is separating them from your personal ones. To do this, you’ll need a business current account if you don’t already have one. A business current account is just like a regular bank account, except it’s specifically for your business. 

With this unique account, you won’t have to shuffle through your transactions to find those relevant to your business. All your business transactions will be easy-to-access in one place and you won’t have to worry about mistaking or missing transactions for your records. Plus, it will be easier to add tips to your business current account and add them to your overall revenue. As a result, it will be more straightforward to find and track your tips. 

How Countingup can help you track your tips and more

Knowing how to record tips in accounting will help you maintain accurate records for tax reports. But, financial management, in general, can be stressful and time-consuming when you’re self-employed. That’s why thousands of business owners use the Countingup app to make their financial admin easier. 

Countingup is the business current account with built-in accounting software that allows you to manage all your financial data in one place. With features like ongoing cash flow insights, you can confidently keep on top of your business finances wherever you are. This tool helps you track what you earn and spend for your business, to more easily update your bookkeeping and record your tips. 

Plus, with the tax estimate feature, Countingup can help you plan for taxes expenses. The year-round estimates will protect you from surprises, including your tips that increase your overall revenue. 

You can also share your bookkeeping with your accountant instantly without worrying about duplication errors, data lags or inaccuracies. Seamless, simple, and straightforward! 

Start your three-month free trial today. 

Find out more here.