Restaurant Accounting: How It’s Different

Accounting methods

Like other industries, restaurants can use cash or accrual methods to do their accounting, though there are subtle differences in how those methods apply. Generally, restaurants that generate less than $1 million per year in revenue can choose either method, but those that generate more than $1 million must use the accrual method. Here’s a look at each accounting method and how a chart of accounts comes into play.

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Cash method

The cash method is the most common accounting method for restaurants because customers pay for their food and services rendered right away. That means they don’t owe you money later (as customers might with a construction project). This also means restaurants probably won’t have an accounts receivable balance. 

With the cash method of accounting, activities are recorded when payment is received. While this might be the easiest method for restaurants, it’s not necessarily the most accurate.

Accrual method

The accrual method, on the other hand, records transactions as they happen, regardless of when payment occurs. This allows for a different activity analysis, showing a more accurate perspective of how expenses are incurred, how income is generated, and how income compares to expenses.

Chart of accounts

A chart of accounts is a list of all the financial accounts a company uses in its internal accounting. It includes a brief description of each account, notes about each account’s type, and account balance summaries. 

Managers use a chart of accounts to summarize all the financial accounts that pertain to the business. They glean information about each account’s status when tracking and reporting company finances.

Tips

Of course, in the restaurant industry, you’ll need to factor in tips along with the standard tax considerations for employees. Tips (not including automatic gratuities, which work differently) are considered employee income, not restaurant income, and are not subject to withholding.

However, that doesn’t mean you don’t need to consider them in your accounting process. Employees at your restaurant are still required to report tips to you, and both you and your employees are required to pay taxes on them – you just don’t need to report them as part of your restaurant revenue.

Accounting periods

Since the day of the week tends to affect restaurant business (for example, a Friday night might bring in more customers, thus making you more money than a quiet Tuesday), it’s useful to employ a four-week accounting period instead of a monthly accounting period, according to Orderly, a leading food-cost management solution.

A four-week accounting period would look at four weeks at a time, each starting on a Monday and ending on a Sunday. That way, you can combine time periods from year to year. With a monthly accounting period, on the other hand, July of last year and July of this year would have a different number of Fridays and Saturdays. This wouldn’t be a big deal in other industries, but it’s essential to note in the restaurant business.

Types of restaurant expenses

Like any business, restaurants will have both fixed and variable expenses. Fixed expenses include costs of operation like rent, utilities, insurance, loan payments, and salaried employees.

Variable expenses are more difficult to budget because they change frequently. Hourly wages for employees and food costs are the most significant variable expenses. Profits will fluctuate, so it’s crucial to use percentages instead of a fixed dollar amount.

Your labor and food costs will be higher if you have a busy week and sales are $10,000, versus a slow week when sales are $5,000. Keep labor and food costs each at 30% of sales to stay profitable.

Here’s a look at the most common types of restaurant expenses.

Inventory management

While other businesses, such as retail stores, might not need to take stock of their inventory on a frequent basis (many businesses can get away with doing so monthly, quarterly, or even once a year), weekly inventory management is critical for restaurants. Why? Because restaurant inventory is food, much of which is perishable and will spoil in less than a month.

Cost of goods sold

The cost of goods sold (COGS) is also an essential part of inventory management. The cost of goods sold equals the direct costs that a company pays to acquire the materials needed to create what it’s selling. In a restaurant setting, this would be the amount paid each month for ingredients used to prepare items on the restaurant’s menu.

Lowering COGS is an excellent way to increase profits. Start with categorizing your items – for example, meats, dairy, and fruits. You can then set a cost percentage for each group, which makes it easier to manage.

It’s also important to minimize waste. Measure ingredients carefully, and ensure that all employees do the same. If a recipe calls for one-quarter cup of cheese, but a half-cup is consistently used instead, that would double your cost for cheese. Those expenditures add up to a significant impact.

Prime cost

The prime cost is the combined cost of food and ingredients in addition to labor expenses. If managed properly, most restaurants can tell how much of their supply costs can be allocated to specific activities (such as catering) or menu items. Many can also tell how much of their labor costs are attributable to specific items or based on relative prep times.

The big difference with prime cost is that it doesn’t include outside costs, such as advertising, manager salaries, and rent.

If a restaurant owner calculates and tracks prime cost (direct material cost plus direct labor cost), over time, they’ll gain deeper insights into the factors that are most affecting their costs. That will help them come up with cost-saving steps to improve the restaurant’s profit margins.

Important restaurant ratios

Some ratios are more relevant to the restaurant industry than others. These include the ratio of food and beverage to expenses and the revenue per seat.

A food and beverage expenses-to-sales ratio tells you how much profit you’re making from a specific menu item. Take the cost of thttps://www.business.com/articles/restaurant-accounting-guide/

he ingredients needed to make the dish one time and divide it by the menu cost of the item. The food cost should be 30% or less.

Some items will provide you with a lower food cost-to-profit ratio than others. Once you identify these items, consider promoting them or offering them as suggestive sales.

Revenue per seat is calculated by dividing the revenue from a given day by the number of seats. This can be helpful when considering renovation or downsizing. If revenue per seat is lower on certain days or periods, consider closing an area of the restaurant to decrease the available seating in these periods. That can result in significant savings on staff and utilities.

If you’re often filled to capacity, however, you’ll have a high revenue per seat. In that case, you might benefit from offering more seating to make room for additional customers.