The Impact of Restaurant Accounting on a Business

Restaurant Accounting March 17, 2021

Cynthia Vespia

Writer

What is Restaurant Accounting?

Restaurant accounting is an essential element of running a restaurant business. It keeps the financials of the restaurant healthy by analyzing detailed statements and KPIs. A new restaurant cannot be managed well without understanding basic restaurant accounting. For example, the cash flow statements indicate the amount of cash coming in to cover expenses. A KPI provides information on how profitable the restaurant is by analyzing labor costs and cost of goods.

Knowing these restaurant accounting basics allows restaurant owners to increase profitability by-

Making informed decisions

Tracking cash flow and KPIs shows which areas of the business need the most attention. If cash flow is shown to be going out more than coming in, it's time to take action. Knowing where the problems lies will help make an informed decision on where to cut back expenses or increasing sales opportunities.

Improving budgeting

Maintaining a healthy budget is priority for restaurant success. Your budget is your future financial plan that consists of both your planned income and expenses. Restaurant account management systems provide financial data that aides in planning expenses. Having an accurate budget will also help establish plans for future revenue and expenses.

Remaining compliant

Maintaining compliance is very important for restaurant owners. Accurate accounting keeps a detailed trail when it comes to reporting numbers for tax purposes. The Generally Accepted Accounting Principles (GAAP) must be followed to remain compliant. Restaurant management systems help maintain accuracy when creating financial statements.

Restaurant Accounting Concepts

The goal of a restaurant manager is to grow profitability. To be profitable, managing money properly is key among daily operations. Even if an accountant has been brought on to do the bookkeeping, restaurant managers should have an understanding of the basic concepts of restaurant accounting for provide better money management. These three restaurant accounting practices will provide insight that allows better control over the restaurant's budget with eyes on profitability.

Account Charts- A chart of accounts shows where the money is coming and going. It is used as an organizational tool by listing all the accounts included in the financial statements of the restaurant. The chart makes it easy to evaluate the financials of the company. Categories can be broken down further to highlight the inventory, sales figures, cost of goods sold, and budget.
Cost of Goods- Cost of goods sold, also called COGS or cost of sales, is the total cost of producing the product sold. For example, the COGS include the ingredient list that makes the dishes on the restaurant menu. Additional costs, such as labor, would not be included. COGS are easily calculated during restaurant inventory. Tracking the profit per plate will keep menu pricing and food cost where it needs to be for each dish sold.
Labor, Cost and Utility Expenses- The labor cost, occupancy expenses, and operating expenses all need to be factored into the budget during accounting. These are standard expenses but, in a restaurant, they will be different than another small business.

Labor Cost includes all the staff members on the payroll. This means any team members front-of-the-house servers and hosts to back-of-house chefs and even busboys should be included. Labor costs are one of the highest expenses in a restaurant. Knowing the breakdown of the cost will help with future investment towards increased profits.
Operating expenses make up the rest of the elements it takes to run the restaurant on a daily basis. Items like dishes, napkins, and even advertising costs are included in the operating expenses.
Occupancy expenses are rent, utilities, property taxes, and insurance. These are fixed costs related to the location meaning they cannot be reduced to increase profits. Restaurants are the only type of small business to include occupancy expenses as part of their income statements.

Restaurant Accounting Methods

Due to the nature of the restaurant industry, and the products being sold, the restaurant accounting methods are very specific. Smaller restaurants often change their inventory based on demand. This is quite a different approach than other industries. As such, the accounting methods used will also be different.

Cash Accounting Method
The cash accounting method uses cash for transactions. Smaller restaurants and bars find this is the best way to do their accounting due to having fewer transactions. The cash method allows generated income to be recorded the moment cash is received for the service. This means transaction are recorded when cash used for pay. Because most bars often receive cash payments immediately when food or beverages are served, the cash method works for this business model. It makes recording payments and revenues easier as the restaurants or bar doesn't have to wait on any accounts receivable balance. They record the payments and revenues as they occur.

Accrual Accounting Method
The accrual method differs from the cash method significantly. Using the accrual method for restaurant accounting will record transactions when they occur instead of as cash is exchanged. This means any COGS are recorded when the restaurant inventory supply is used, not when suppliers are paid. Using the accrual method gives restaurant owners a clear portrayal of the restaurant's financials. Income can be compared to expenses and analyzed at any time providing an accurate view of the restaurant's financial health.

Bottom line is that both cash accounting and accrual accounting methods can be adaptable. The decision on which restaurant accounting method to use depends on accounting preferences and the restaurant's needs.

Restaurant Accounting Wrap-up

Restaurant accounting keeps the financials of the restaurant healthy by analyzing financial statements and KPIs.
Choosing cash or accrual counting methods will depend on the accounting preferences and operations of the restaurant.
COGS indicates Cost of Goods Sold
Knowing restaurant accounting basics helps restaurant owners increase profitability
Make sure to have an understanding of restaurant accounting even if outside help is hired