Restaurant Accounting Methods: The Essential Guide
Posted: Apr. 26, 2019
Accounting for restaurants is a topic that many restaurateurs might like to avoid thinking about. However, it’s an essential element of running your venue. After all, you can’t manage your restaurant without going into the accounting details.
But you didn’t get into the restaurant industry to become an accountant, did you?
You probably joined the industry to make delicious food to serve, as well as create a great environment for your patrons. Balancing your books and managing your finances are not really part of that overarching plan, but they should be. In order to successfully manage your accounting, you should consider hiring a restaurant accountant or investing in restaurant accounting software.
So, what is restaurant accounting?
Restaurant accounting is the process of interpreting and analyzing the revenue, cash flow, inventory, and income statements of a restaurant. In a nutshell, you must document all financial transactions for your business.
In order to keep your restaurant running, it’s important that you have good bookkeeping and accounting processes in place. In order to help you do that, we’ve compiled a guide with essential elements you should keep in mind:
- Important vocabulary
- Major players
- Common accounting methods
- Restaurant accounting FAQs
- Restaurant accounting tips
- Accounting software recommendations
By using the right restaurant accounting software and even a restaurant-focused accountant, you can set your financial situation up for success and cut down on unnecessary expenses. Keep track of what’s costing you extra money, where you can save, and where you’re doing well by investing in the tools you need.
Are you ready to explore this guide and learn how best to run your accounting strategy? Let’s take a closer look!
1. Important vocabulary for restaurant accounting
Part of understanding accounting for restaurants means knowing certain terminology. This vocabulary will extend into your actual accounting process, so knowing what each process entails will increase your chances of being financially successful and responsible.
Let’s start with some basic terms:
- Cost of Goods Sold (COGS): This is the cost of all the items and ingredients you have on your menu (Beginning Inventory + Purchased Inventory - Ending Inventory). Note that this does not include restaurant labor costs.
- Restaurant Labor Cost: This is the cost of the labor it takes to run your restaurant and can include your bussers, servers, hosts, and anyone else on your payroll. This also includes payroll taxes and employee benefits. Note that this does not include your COGS.
- Prime Cost: This is your COGS plus your labor costs (essentially, all of the food and beverage costs, as well as your payroll costs, taxes, and benefits).
- Chart of Accounts: These are the categories of money that flow in and out of your restaurant. The categories include assets, liabilities, revenue, expenses, and equity.
- Occupancy Expenses: This refers to fixed costs like rent, property taxes, utilities, and property insurance. These expenses don’t change and can’t be adjusted to cut your costs.
- Operating Expenses: This is everything else that you need to run your restaurant on a daily basis, like marketing expenses and supplies (napkins, silverware, etc.).
Now let’s take a look at some other, more in-depth terms:
- Cost-to-Sales Ratio: This is your food cost divided by food sales, multiplied by 100%, The ratio you’re aiming for here is between 28% and 35%, which is the restaurant industry average.
- Food Cost Percentage: This is your beginning inventory plus your food purchases, minus your ending inventory, divided by food sales. Your beginning inventory is your food inventory at the beginning of the month, while your food purchases are the costs of all the food purchases during that given month. Your ending inventory is the food inventory at the end of that month, and the food sales are your total food sales for that month.
- Cashier’s Summary: This is a summary that includes the starting cash, as well as all dollar amounts that are run through that particular register. Credit card transactions should be categorized by card company, if possible. Other numbers to record include sales tax, tips on credit cards, and how each payment was made (tender type).
Take note of these different numbers that need to be accounted for when running your restaurant, and you’ll be in a better place to determine how your restaurant is doing financially. Still not sure you have the understanding you need to do your restaurant accounting? Let's take a look at the major players involved in the next section.
2. The major players of restaurant accounting
Accounting for restaurants is not a one-person job. In fact, it takes cooperation between several different teams and areas of your restaurant. In order to ensure accurate information is recorded and accounted for, that information needs to be retrieved accurately in the first place.
Let’s take a look at the major players who make this happen:
- You. You’re the one who runs your restaurant with a vision and a purpose: to serve great food in a great setting. However, in order to be financially responsible when it comes to your restaurant, you need to understand not only the terminology that comes with restaurant accounting, but how it applies to your restaurant’s needs. This means investing in the right tools, software, and manpower.
- Your accountant. If you’re going to hire a professional, be sure to use a restaurant-specific accountant who can keep you updated about industry benchmarks and make sure you understand what your financial goals should be. Your accountant will likely be working with other restaurants, so it’s a good idea to set up goals similar to those of restaurants like yours.
- Your POS. It’s important that your accountant’s software, whether it’s QuickBooks or another program, integrates with your POS system. By ensuring it does, this means automatic reconciliation will occur with your sales and bank deposits.
- Your front-of-house and back-of-house staff. Your FOH and BOH staff members are also major players. For instance, your FOH staff will be using your POS system, which means they need to process transactions correctly and report their tips. While tips are not subject to withholding and not classified as restaurant income, they still must be reported because you and your staff need to pay taxes on them. Make sure everyone is responsible for reporting the right information.
Keep each individual’s role in mind and think of ways to hold them accountable. For instance, have your accountant monitor the percentage of cash tips versus cash sales. This ratio should be similar to the ratio of credit card tips to credit card sales. Doing this will discourage servers from the temptation to keep more cash tips than they made.
All of these key players are important to your restaurant's financial success and should not be overlooked. Be sure to monitor each area and individual, and you’ll be on your way to having a great restaurant accounting process.
3. Common restaurant accounting methods
When it comes to accounting methods, restaurants have a couple of options: cash or accrual accounting. But whichever they use comes with some implications. Let’s explore this further.
Do restaurants use cash or accrual accounting?
Simply put, any restaurant with revenue under $1 million can choose which accounting method they want to use (cash or accrual); however, any restaurant that earns more than $1 million in revenue must use the accrual method. So, what’s the difference?
- Cash method. The cash method may certainly be the easier accounting method for restaurants, but it’s not always the most accurate. The cash method records income as it enters your bank account and also records expenses when they are paid. However, tracking income before expenses will make your restaurant seem more profitable than it actually is.
- Accrual method. The accrual method is different than the cash method because it accounts for transactions as they occur. The revenue and expenses are accounted for right at the time of the transaction, regardless of when the payment is made. This creates a more accurate view of how expenses are incurred and where the income is coming from. As a result, restaurants can gain a more accurate understanding of their income and expenses.
Note: The "payment" occurs when cash is received and expenses are paid, whereas the "transaction" is when goods are exchanged, such as food to a customer or supplies from the vendor to the restaurant.
Depending on your restaurant’s financial situation, you may or may not have a choice when it comes to the accounting method you want to use. Your restaurant accountant can guide you in the right direction.
4. Restaurant accounting FAQs
You may have some questions at this point about accounting for restaurants, and it’s important that those questions are answered. There is some confusion about accounting and bookkeeping, for instance, and it’s essential that you ask yourself the following questions to gain a better understanding of how restaurant accounting really works.
What is the difference between accounting and bookkeeping?
Bookkeepers are responsible for recording financial transactions. However, accountants are responsible for interpreting, classifying, analyzing, reporting, and summarizing this financial data. This is the biggest difference between restaurant accounting services and restaurant bookkeeping: accounting involves interpreting and analyzing data, while bookkeeping does not.
What does an accountant do in a restaurant?
Restaurant accountants keep track of cash flow, inventory, and income statements, and must document all financial transactions for the restaurant. More specifically, they record each transaction (e.g., a meal purchased) in an accounting journal, and then all of the payments are eventually recorded as a way to review all of the accounting for the restaurant.
In terms of inventory, accountants should count inventory on a weekly basis to ensure there’s not too much or too little. When it comes to income statements, this shows the restaurant's profits and losses over a certain period of time (as demonstrated through earnings, expenses, and inventory). As with inventory, these should be done on a weekly basis to ensure the restaurant is not losing money and allow the restaurant to determine where to cut expenses, if needed.
How much does a restaurant accountant cost?
A restaurant accountant will typically charge by the hour and the costs will depend on the type of work, the size of the restaurant, and its location. An accountant will also cost more than a bookkeeper, as a bookkeeper is generally less-trained (or less-experienced) in the field and does more routine work.
What is the best accounting software for restaurants?
The best restaurant accounting software should be cloud-based (or online). We recommend brand-name products, such as QuickBooks, because they offer specialized modules that are specifically meant for restaurant accounting.
By asking yourself the important questions, you’ll ensure you hire the right professionals and employ the right tools based on your restaurant’s needs. Take a look at your bottom line and determine if investing in a POS system that integrates with accounting tools could be worth your while (spoiler: it definitely is!).
5. Restaurant accounting tips
After you’ve asked yourself the essential questions, it’s a good time to take a look at the recommended restaurant accounting tips you should incorporate into your process. From hiring an accountant to tracking your inventory, all of these restaurant accounting best practices will ensure you balance your books and stay on track.
Be sure to incorporate these tips:
- Hire an accountant. If the whole accounting process is confusing to you, it’s a good idea to hire an accountant who can walk you through the steps and terminology, as well as interpret the information and data. Be sure to hire an accountant who has worked in the restaurant industry. You can even ask for referrals from other local managers or owners.
- Use the appropriate tools. By using restaurant accounting software like QuickBooks, you can easily record your food sales, beverage sales, cashier’s summaries, operating expenses, and more.
- Choose a good POS system. As mentioned earlier, your POS system should offer features that allow you to integrate with your restaurant accounting software. This will help you track inventory as well as labor costs and payment types.
- Pay your bills. Be sure to stay one step (or two!) ahead of your bills. You can begin by paying your bills once a week and then adjust going forward, whether that means paying bills more often or less frequently.
- Pay your taxes. Part of the reasoning behind hiring an accountant is ensuring you’re tracking your taxes correctly. Check local and state laws to see which taxes apply to your restaurant, and determine what your area’s sales tax rate is. Most tax payments happen every few months or annually, but the timeline will be determined after you apply for your employer identification number (EIN).
- Track your inventory. Managing your inventory allows you to gain valuable insight into costs by understanding your COGS. Your accountant can use your COGS to determine where you're spending too much on food, if you're ordering too much, or even if someone is stealing.
- Hire someone to do your payroll. Payroll is a large undertaking, and it may be worth outsourcing your payroll to ensure accuracy and keep you focused on what else you need to be doing.
- Watch your sales. Day-to-day sales can impact other parts of your restaurant, such as inventory and payroll. Record all of your sales on a daily basis in order to make reporting easier for later.
- Do regular P&L statements. Taking the time to generate profit and loss statements (whether that is weekly, monthly, or annually) will show you where your business is going financially.
There are a lot of best practices to consider, but these are a great starting point if you’re not sure how to go about improving (or starting) your restaurant accounting process. By building on these fundamentals, you’ll be able to gain a better understanding of your restaurant's financials and move forward from there.
6. Restaurant accounting software recommendations
As we’ve mentioned throughout this article, you should choose restaurant accounting software that integrates with your POS system. This is important because your sales and bank deposits will update automatically.
For instance, Lavu’s POS system has an open API that allows for integration with accounting software, such as QuickBooks. You need to balance your books to be successful, but if you’re not looking to spend hours upon hours going through spreadsheets and formulas, using this integration will offer you simple and easy accounting tools.
Beyond these integrations, Lavu’s POS system offers inventory tracking, versatile reporting, and many other features that can help you easily run your restaurant's operations. If you want to make your restaurant accounting and other tasks more manageable, check out Lavu!
Accounting for restaurants can be daunting, but it doesn’t have to be if you choose the right approach. Invest in the right restaurant accounting software and professionals, and you’ll be on your way to maintaining your financial data in an effective and streamlined way!
If you’re looking for more information on restaurant accounting or POS software, check out these additional resources below:
- iPad POS Systems: The Ultimate Guide (With Additional Reviews). iPad POS systems are being considered the future of customer-employee interactions. Learn more about them here.
- 5 Restaurant POS System Costs to Consider (Before You Buy). There are several types of costs that you should consider before investing in a POS system. Explore what those are in this helpful article.
- Restaurant Point of Sale. Learn more about Lavu’s restaurant POS system, which can integrate with accounting software, as well as a variety of other software types.
Posted: Apr. 26, 2019 | Written By: Lavu