For years, credit card fees have been known as ‘the cost of doing business,’ but as costs continue to increase, we are also seeing an increase in the number of restauranteurs charging customers a fee for using a credit card, often called a service fee. Service fee charges can be a percentage of the total bill or a standard dollar amount applied to all service fee transactions. One common area of confusion for restaurant companies is the proper accounting treatment of service fees charged to customers.
Accurately handling service fees under GAAP (Generally Accepted Accounting Principles) and ASC 606 (Revenue from Contracts with Customers) is essential for accurate financial reporting. Below are key considerations to include when determining the proper treatment for service fees charged to customers.
ASC 606 Overview (Five-Step Model)
- Identify the Contract: The customer’s order and payment agreement create an implied contract. The contract is established when the customer agrees to purchase food and pay.
- Identify Performance Obligations: The primary performance obligation is to deliver food and beverages; the service fee may or may not be a separate obligation.
- Determine the Transaction Price: The total amount the restaurant expects to receive, including the meal price and service fee. The restaurant decides if the service fee is part of the transaction price or a pass-through cost.
- Allocate the Transaction Price: Allocate between the food/beverage and service fee if the fee is a separate performance obligation. If the fee is separate, allocate the transaction price between the food and service fee.
- Recognize Revenue: Recognize revenue when the obligation is satisfied (usually when food and beverages are delivered). Recognize revenue when food is delivered. If acting as a principal, recognize both the food and service fee revenue; if an agent, only recognize the food revenue.
Agent vs. Principal: Key Considerations
Each restaurant has the ability to control the service (i.e., the amount of service fee) and charge the customer directly. This results in the restaurant being the principal in the relationship. This treatment requires service fee income and the related service fee expense to be presented grossly on the income statement.
If the restaurant facilitates the fee collection on behalf of a third party (e.g., the payment processor), it would be considered the agent. This treatment requires the service fee income and the related credit card fee expense to be presented net on the income statement. It should be noted that this is not a common practice and isn’t expected.
Example: Restaurant as Principal
- Situation: A customer in a restaurant is paying with a credit card, and their total bill amounts to $100. The restaurant has a policy that when credit cards are used as a form of payment, customers are automatically charged a 2% service fee in order to help offset the cost of credit card fees incurred by the restaurant.
- Treatment: The restaurant is the principal and, as such, should recognize the total amount ($100 meal + $2 service fee ($100 * 2%) as revenue on the income statement.
- Journal Entry:
- Debit: Credit Card Receivable $102
- Credit: Food & Beverage Revenue $100
- Credit: Service fee Revenue $2
Conclusion
Service fees charged to the customer are expected to result in the restaurateur being the principal in the relationship. For proper financial reporting, service fees should be classified as revenue on the income statements, and the related credit card fee should be classified as an operating expense. It is also important to ensure your financial statement disclosures have a policy note related to the accounting and classification of these revenue sources.
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