Restaurant Accounting: How It’s Different From Other Industries & Best Practices

How restaurant accounting is different

While core accounting principles are similar for all businesses, how restaurants handle and use inventory, accounting periods, expenses, tips and ratios necessitates a more nuanced approach and knowledge base.

“Restaurant accounting has its own set of challenges that you just don’t see in most other industries,” said Chelsea Gunn, general manager of product, accounting at Restaurant365. “Operators are working with incredibly thin margins, daily fluctuations in sales, and constantly changing costs for things like food and labor. On top of that, they’re dealing with things like tip reporting, spoilage and multiple revenue streams — from dine-in to takeout and even catering. It’s a fast-moving environment, so the accounting needs to be just as dynamic.”

1. Restaurants must choose the right accounting method for their needs.

Like other industries, restaurants can use cash or accrual-based accounting. However, there are subtle differences in how those methods apply. Generally, restaurants that generate less than $30 million per year in average annual gross receipts can choose either method, but those that generate more than $30 million must use the accrual method. 

Here’s a look at each accounting method and how a chart of accounts comes into play for restaurants:

• Cash method: The cash method is the most common accounting method for restaurants because customers pay immediately for the food and services rendered. They won’t pay you at a later date as construction project customers might, for example. This immediacy also means restaurants likely 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: In contrast, the accrual method of accounting records transactions as they happen, regardless of when payment occurs. This method 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 lists 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. Restaurant 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.

2. Restaurants must consider tips in their accounting process.

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, restaurants still must consider tips in their accounting process. Restaurant employees must report tips to you and both you and your employees are required to pay taxes on them. However, you don’t need to report them as part of your restaurant revenue.

“Every tip dollar must be tracked every shift of every day,” said Ray Rodriguez, owner of Casuelas Cafe and Cork Tree Restaurant. “This includes not just obvious tips from customers to employees (servers, bartenders, hostesses), but also internal distribution or sharing of these tips with other line employees such as busboys, food runners and even kitchen staff. The only staff not allowed to participate in the tipping system are owners and management.”

3. Restaurants must consider accounting periods.

Specific days tend to affect restaurants more than many other businesses. For example, a Friday night might bring in more customers and money than a quiet Tuesday. For this reason, many restaurants use a four-week accounting period instead of a monthly accounting period. (An accounting period is the time frame a business uses for financial reporting.)

A four-week accounting period considers four weeks at a time; each week begins on a Monday and ends on a Sunday. Restaurant owners can compare accounting periods from year to year. 

In contrast, a monthly accounting period will have a different number of Fridays and Saturdays. 

This nuanced difference likely wouldn’t matter in many other industries, but it’s an essential factor in the restaurant business.

4. Restaurants must consider unique expenses in their budgets. 

Like any business, restaurants have both fixed and variable expenses:

• Fixed expenses: Fixed expenses for restaurants include operating costs like rent, utilities, insurance, loan payments and salaried employees.
• Variable expenses: Variable expenses are challenging to budget for because they change frequently. Restaurants must deal with significant variable expenses, including food costs and employee hourly wages. 

A restaurant’s profits will fluctuate, so it’s crucial to use percentages instead of fixed dollar amounts when budgeting. For example, labor and food costs will be higher during a busy week with $10,000 in sales than a slow week with $5,000 in sales. For budget planning purposes, to stay profitable, you’ll want to keep labor and food costs each at 30 percent of sales.

Another consideration to think about is how to account for employer-supplied meals, Rodriguez also pointed out.

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

• Inventory management: In retail accounting, frequently taking stock of your inventory is likely unnecessary. Many retail businesses can get away with inventorying their stock monthly, quarterly or even once a year. In contrast, weekly inventory management is critical for restaurants because restaurant inventory is food — much of which is perishable and will spoil in less than a month.
• Cost of goods sold (COGS): COGS is the direct costs a company pays to acquire the materials to create its products. In restaurants, this would be the monthly cost for ingredients. Lowering your COGS is an excellent way to increase restaurant profits. Start by categorizing your items — for example, meats, dairy and fruits. You can then set a cost percentage for each group, making it easier to manage. Minimizing waste is another way to lower your COGS. For example, if a recipe calls for one-quarter cup of cheese, but a half-cup is consistently used, your cheese costs would double. 
• Prime cost: In restaurants, the prime cost is the combined cost of food, ingredients and labor expenses. If appropriately managed, 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. Your prime cost won’t include outside costs, such as advertising, manager salaries and rent. If a restaurant owner calculates and tracks prime cost over time, they’ll gain deeper insights into the factors most affecting their costs. This will help them devise cost-saving steps to improve the restaurant’s profit margins.

5. Restaurants must consider crucial accounting ratios.

Some accounting ratios are more relevant to the restaurant industry than others, including the ratio of food and beverage to expenses and the revenue per seat:

• Ratio of food and beverage to expenses: A food and beverage expenses-to-sales ratio tells you how much profit you make from a specific menu item. Take the cost of the ingredients needed to make the dish one time and divide it by the item’s menu cost. The food cost should be 30 percent or less. Some items will provide a lower food cost-to-profit ratio than others. Once you identify these items, consider promoting them or offering them as upselling and cross-selling options.
• Revenue per seat: Revenue per seat is calculated by dividing the revenue from a given day by the number of seats. This ratio can be helpful when considering renovation or downsizing. If revenue per seat is lower during specific days or periods, consider closing an area of the restaurant to decrease the available seating during these times to save on staff and utility costs. However, if you’re often filled to capacity, you’ll have a high revenue per seat. In that case, you might benefit from offering more seating to accommodate additional customers.

Best practices for accounting for restaurants

Accounting for restaurants presents unique challenges due to factors like high inventory turnover, perishable goods, varied payment methods and significant labor costs. Implementing best practices is important to maintain profitability and financial stability.

Use accounting software along with a compatible point-of-sale system.

Integrating your accounting software with your POS system is a key step towards efficient financial management in a restaurant. This connection streamlines data flow and provides a holistic view of your operations.

“The more you can connect your accounting to your operations, the better,” Gunn said. “It gives operators the full picture they need to make smart, timely decisions without getting bogged down in spreadsheets.”

Stay on top of your numbers.

Proactive daily monitoring of your restaurant’s financial metrics helps you identify trends, control costs and make timely adjustments. 

“That means reconciling sales every day, keeping a close eye on inventory, and making sure labor and food costs are in check,” Gunn said. “Automation can really help here — tools that handle invoice entry, payroll, vendor payments and financial reporting can save a ton of time and reduce errors.”

Collect and remit sales tax.

Accurate collection and timely remittance of sales tax are non-negotiable legal obligations for every restaurant. Mismanagement in this area can lead to significant penalties. Sales tax is determined by state and local laws.

It’s a good idea to keep a separate payables account for sales tax collected, and to exclude that figure from the restaurant’s revenue. A good POS system should be able to help you track this, but you may want to seek assistance with filing your sales tax returns if accounting isn’t your strong suit.

Correct errors the moment they are discovered.

Financial accuracy is paramount. Be sure to address discrepancies and errors as soon as they arise, which will help prevent small issues from escalating into major problems that can distort your financial picture and lead to incorrect business decisions. This includes correcting time cards, noting shortages on deliveries and auditing server receipts during every single shift. 

Track your prime costs.

Prime costs, or the combination of your cost of goods sold and labor costs, represent the largest expenses for most restaurants. This includes food and beverage costs, salaries, payroll taxes and benefits. This type of cost makes up the majority of a restaurant’s expenses, and is the best indicator of its profitability. Monitoring them will help you decide whether you need to make changes to order quantities or raise menu prices.

Danielle Bauter and Sean Peek contributed to the reporting and writing in this article.