Restaurant Accounting- Understanding the Basics
Restaurant accounting is an essential process that every establishment needs to determine its financial health and profitability.
When starting a restaurant, many restaurant 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 management 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
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
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)
Beginning Inventory + Purchases Inventory Ending Inventory
- Restaurant Labor Cost
- Direct Labor
- Prime Cost
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
- Cost-to-Sales Ratio
(Food Cost / Food Sales) x 100
- Food Cost Percentage
(COGS / Total Sales) x 100
- Restaurant Accounting Cycle
- Cashier's Summary
- Reconciling the Balance Sheet
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.
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