Accounting for restaurants differs in some important ways from accounting in other industries. Here are the main differences you need to know.
You might think accounting is the same across the board, but it can actually differ quite a bit from industry to industry. So what sets restaurant accounting apart? On the surface, it's really not all that different from standard accounting practices – restaurant accounting uses many of the same costing methods, as well as profit and loss (P&L) statements and cash flow reports just like many other industries do. However, much like a restaurant comes with its own unique expenses, restaurant accounting has its own nuances. Here are some of the main things you need to know.
Like other industries, restaurants can use the cash method or the accrual method to do their accounting, though there are some subtle differences. According to Chron.com, restaurants that generate less than $1 million per year can choose their method, but those that generate more than $1 million must use the accrual 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 on (like what might happen with a construction project). This also means restaurants probably won't have an accounts receivable balance. With this method, activities are simply recorded when payment is received. While this might be the easiest method for restaurants, it's not necessarily the most accurate.
The accrual method, on the other hand, records transactions as they happen, regardless of when payment occurs. As Chron says, this allows for a different analysis of activity and shows a more accurate perspective of how expenses are incurred and income is generated, and how income compares to expenses.
Of course, in the restaurant industry, along with the standard tax considerations for employees, there's also the need to factor in tips. 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 they and you are required to pay taxes on them – you just don't need to report them as part of your restaurant revenue.
Since the day of the week tends to affect business (for example, a Friday night might be busier and bring in more customers, thus making you more money than a quiet Tuesday), it's useful for restaurants to use a four-week accounting period instead of a monthly accounting period, according to Orderly. 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. July of last year and July of this year would have a different number of Fridays and Saturdays. In other industries, this wouldn't be a big deal, but it's essential to note in the restaurant business.
While other businesses, like retail stores, might not need to take stock of their inventory on such a frequent basis (many businesses can get away with doing so monthly, quarterly or even once a year), it's important for restaurants to monitor their inventory on a weekly basis. Why? Because restaurant inventory is food, much of which is perishable and will spoil before a month is over.
Cash flow and P&L statements
Like with inventory, some businesses might do profit and loss statements on a monthly or quarterly basis (though you can really do them as often as feels necessary). Chron notes that weekly P&L statements are smart for restaurants, because it can help with managing inventory. Cash flow reports should also be more frequent for the same reason.
For more information on restaurant accounting, check out Restaurant Accounting 101, as well as our in-depth Restaurant Accounting Guide, which can also help you choose restaurant-specific accounting software.