Restaurant Accounting: How It’s Different

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.

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 $1 million per year in revenue can choose either method, but those that generate more than $1 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.

Of course, 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.

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.

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.

The best accounting software for restaurants

The best accounting software for restaurants can help restaurant owners and managers easily navigate the world of restaurant accounting. Here are a few top options to help you choose the right accounting software for your operation: 

Intuit QuickBooks Online 

QuickBooks Online is a straightforward accounting platform ideal for restaurants. The cloud-based software has a user-friendly interface but goes beyond basic bookkeeping to offer expense tracking, cash flow management and integrated payment acceptance to streamline transactions.

Higher tiers unlock advanced features like business analytics and on-demand training, while seamless integrations with popular applications like BILL, Salesforce and HubSpot further enhance its capabilities. Our QuickBooks Online review explains this platform’s helpful built-in access to QuickBooks Live Bookkeeper, a service that connects users with accounting professionals trained in the software.

Sage 50 Accounting

Sage offers extensive customization options, allowing users to tailor its functionality to their restaurant’s specific needs. Sage goes beyond basic features, providing benefits like cash flow forecasting and unlimited users. Our Sage 50 Accounting review details this platform’s user-friendly interface, automation features and integrations with various business applications, which make it a top pick for restaurants seeking a customizable and easy-to-use accounting solution.

Xero Accounting Software

Xero’s cloud-based accounting software offers plans and features designed for growth, allowing restaurants to adjust as their needs evolve. It integrates seamlessly with popular business apps to help you generate essential reports, manage customer interactions and gain financial insights. As our detailed Xero review explains, Xero’s reliable customer support, with 24/7 email and live chat, is also a major selling point for busy restaurant owners and managers.

ZarMoney

ZarMoney offers a wider range of built-in reports and customization options than many competitors. This cloud-based software provides robust payment processing tools and can help restaurant owners effectively manage estimates and sales orders. Our ZarMoney review outlines how this platform’s seamless bank integrations and user-friendly batch deposit functionalities make it a compelling choice for restaurants seeking deeper financial insights at a transparent price point.

Zoho Books

Tight budgets are a reality for many restaurants. Zoho Books offers budget-friendly automation, with a free plan for solo users and affordable tiered options for growing businesses. Zoho boasts a unique automation engine that non-programmers can leverage to streamline tasks and mitigate errors. As our Zoho Books review explains, the software is available on mobile devices, so users can manage finances from anywhere — a plus for restaurants with multiple locations.

Sean Peek contributed to this article.