Restaurant Accounting- Understanding the Basics

When starting a restaurant, many small business owners focus on the logistics of creating a brand, menu, and sourcing materials and labor. However, accounting is a significant element that determines how well a restaurant performs.

Restaurant accounting considers all income and expenses to determine a company's profitability and areas for improvement. There are many different aspects within the accounting process, requiring a qualified accountant to address every procedure.

What is Restaurant Accounting?

Restaurant accounting, also known as restaurant bookkeeping, refers to the various activities necessary to record transactions and monitor financial standings. This allows restaurant owners to analyze the business's stability, profitability, and overall performance.

The restaurant accounting process includes several tasks, such as-

Recording transactions in a master document.

Categorizing transactions and expenses.

Analyzing income and expense reports.

Collaborating with Accounts Payable (AP).

Consolidating and organizing banks statements.

Creating financial documents, such as a balance sheet and cash flow report.

Creating and monitoring a budget and key performance indicators (KPIs) for staff.

Completing tax returns.

Generating actionable financial insights and advice

Conducting audits.

By successfully managing the various aspects of accounting, businesses can-

Make informed financial decisions based on real-time data.

Improve budget strategies by gaining accurate insights on income and expenditures.

Remain compliant with health codes and restaurant industry regulations.

Common Restaurant Accounting Strategies

Generally speaking, there are two main accounting strategies that modern restaurants utilize.

Restaurants that generate revenue below one million dollars can choose either cash or accrual accounting, as they handle a relatively small amount of income at a time. On the other hand, establishments that exceed a million dollars must use the accrual method.

Each strategy holds its own set of unique implications-

Cash Accounting

The cash accounting strategy is easier to perform between the two methods but is not always accurate. The accountant reports income with every deposit that enters the company's account and expenses once they are paid.

However, depending on the restaurant, if income precedes expenses, reports may show that the business is more profitable than it is. This can have a negative effect on budgeting and planning payments.

Accrual Accounting

The accrual strategy accounts for all transactions as they occur, rather than when payments are made. In this case, transaction refers to when goods are exchanged, whether for income or as an expense.

For example, money is exchanged for the customer's food or supply order. This gives a more accurate view of income and expense sources, enabling management to create a reliable company budget.

Keywords for Restaurant Accounting

Delving into restaurant accounting with limited knowledge can become overwhelming. By learning a few key concepts and terms, restaurants can better understand the accounting process-

Cost of Goods Sold (COGS)

COGS is the cost of the entire restaurant inventory, such as the ingredients needed to fulfill the menu. The COGS can be calculated per menu item to find how much every dish is worth, determining the restaurant's profitability. The COGS formula is-

Beginning Inventory + Purchases Inventory Ending Inventory

Restaurant Labor Cost

This is the cost of labor required to run the restaurant on an average workday. This expense is typically one of the highest restaurant costs, alongside food. Labor costs include wages for servers, hosts, bussers, cooking staff, and others on the payroll. Accountants must also include payroll taxes, employee benefits, and any overtime.

Direct Labor

Direct labor refers to the cost to maintain a restaurant, including labor and resources.

Prime Cost

Prime cost is the total of COGS and labor costs, including all expenses incurred on supplies, employees, and taxes. Restaurants need to have an accurate measure of prime cost, as it consists of the majority of cash flow.

Chart of Accounts

Chart of accounts is a list that determines what areas handle cash flow in and out of a restaurant. This typically includes assets, liabilities, revenue, expenditures, and equity.

These groups are organized with balance sheets and income statement accounts. However, many businesses use subcategories to further break it down, including marketing budget, COGS, total sales, and inventory costs.

Fixed vs. Variable Expenses

Fixed expenses do not fluctuate depending on sales or usage. Common fixed costs include rent, labor wages, and operating expenses. Variable costs, on the other hand, change based on sales, labor, and other elements. This could include direct labor, taxes, and commissions.

Cost-to-Sales Ratio

This metric divides food cost by food sales to determine how much profit is made from each menu item. Restaurants should aim between 28% and 35%, as it shows good financial health.

(Food Cost / Food Sales) x 100

Food Cost Percentage

This metric divides the COGS by total sales from a specific timeframe to determine food costs from the remaining inventory.

(COGS / Total Sales) x 100

Restaurant Accounting Cycle

This is the process restaurants use to prepare financial documents during an accounting cycle. The process is initiated when a customer places their order. The transaction is then recorded in the point-of-sale (POS) system and transferred to the ledger.

Cashier's Summary

The cashier's summary lists the starting cash and all transactions throughout the day. Deposits should be categorized by credit card companies, cash, sales tax, tips, and amount.

Reconciling the Balance Sheet

While the balance sheet defines assets and liabilities, many accountants tend to only pay attention to the profit and loss statement. However, the balance sheet must first be double-checked to ensure the values are accurate.

Restaurant accounting is a tedious process that requires attention to every financial aspect of a business. When done correctly, establishments can gain an accurate view of their overall performance and profitability.

Restaurant Accounting- Understanding the Basics

What is Restaurant Accounting?

Common Restaurant Accounting Strategies

Keywords for Restaurant Accounting

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