Restaurant accounting: A simplified recipe

Restaurant accounting vs. restaurant bookkeeping

Although some people may use it interchangeably, restaurant accounting and bookkeeping are different.

Restaurant accounting uses data to assess your restaurant’s financial situation and make business decisions. An accountant will create financial statements, build financial reports, and oversee the bookkeeper’s work. 

Restaurant bookkeeping focuses on managing the financial books and documenting transactions. A bookkeeper will deliver balance sheets, produce invoices, and reconcile bank accounts.

What factors into restaurant accounting

There are several factors to restaurant accounting, including important vocabulary, different types of expenses, accounting cycles, and items you have to track. Learning about these will help you understand how restaurant accounting works and what you can expect.

Restaurant accounting vocabulary 

Using words like al dente or flambé comes naturally to you, but accounting terms? Probably not so much. 

Here is some important restaurant accounting vocabulary you should know:

• Cost of goods sold (COGS): the total cost of ingredients to prepare the food for your restaurant, not including labor costs. 
• Direct labor: the total costs of employees directly involved in maintaining the restaurant, including salaries and wages.
• Prime costs: the total direct costs to produce and serve your products, including labor costs and cost of goods sold. For example, your staff’s salary, food ingredients, beverages, and taxes.  
• Cost-to-sales ratio: the percentage of how many sales you make compared to your costs, which derives from dividing food costs by food sales. 
• Food cost percentage: the percentage of how much food costs at your restaurant. You calculate it by adding beginning inventory and inventory purchases, subtracting ending inventory, then dividing that by sales. 
• Balance sheet reconciliation: the process of ensuring your balance sheet is correct by cross-checking balances and entries. 

If you’re hiring an accountant for your restaurant, you might not need to know these in-depth, but it will help you understand what they're talking about and your overall financial situation. 

Different types of expenses

The next restaurant accounting area you’ll need to pay attention to is the expenses. Tracking expenses monthly and even weekly helps you understand how you can improve and cut down spending.

Here are the different two types of restaurant expenses you’ll need to track: 

• Operating expenses: the cost to run your restaurant every day aside from inventory and payroll costs. It includes marketing expenses, silverware, tableware, and supplies such as napkins. 
• Occupancy expenses: the fixed costs to run your restaurant, including rent, utilities, insurance, utilities, and property taxes. 

Your restaurant expenses fall into two categories: fixed and variable expenses. Fixed expenses usually stay the same despite your sales and include the occupancy expenses. Variable expenses change based on your sales and other factors, which include operating expenses.

Restaurant accounting periods

When doing restaurant accounting also compare your performance over time. Choosing the right accounting period allows you to accurately compare your performance period over period.

There are different types of accounting periods, including: 

• Calendar year: Follows the 12-month calendar starting from January 1 until December 31. 
• Fiscal year: Uses the annual period of 52 weeks and doesn’t have to end on December 31, so businesses may choose a different start day, for example, going from October 1 until September 30 of the following year. 
• 4-4-5 calendar year: divides the year into four quarters, each of which has 13 weeks: two 4-week months and one 5-week month 

Although there are many options, most restaurant and retail businesses choose the 4-4-5 calendar year accounting period. Restaurants usually run seven days a week and might have some days with more sales. Opting for four and five-week periods, totaling 13 accounting periods gives you a more accurate comparison. 

If you were to use a calendar year accounting period, for example, you’d have to compare longer months with shorter months, and sometimes one day can make a big difference. 

Figures to track

Just like keeping track of orders, oven temperatures, and the right amount of salt, you have several things to track when doing accounting for your restaurant.

Here are some figures to track: 

• Payroll: Keep track of all employee’s payrolls and account for overtime pay and different shift schedules with payroll software. 
• Inventory: Track inventory value weekly or daily, including raw materials, to maintain balance, as much of your inventory could be perishable goods.
• Profit and loss (P&L) statements: Create profit and loss statements, which include revenues and expenses, to track your restaurant's performance and assess your profitability.
• Balance sheet: Use a balance sheet to summarize your restaurant’s financial position for a specific period. 
• Cash flow statements: Your cash flow statement will track how much money flows in and out of your restaurant to manage your cash efficiently.
• Chart of accounts: Keep your chart of accounts up to date with all account numbers and names relevant to your restaurant to make it easier to work with your accountant. 
• Tips: Although tips are not considered restaurant revenue, you should still keep track of them so that employees can report them as income.

We know this is a lot to track, but once you make it a habit or have someone in charge of your restaurant accounting system, it will be like cooking your favorite recipe.  

Restaurant accounting methods to choose from

There are also two different accounting methods you can choose from when doing restaurant accounting: Cash and accrual accounting. Although you can choose which one to use, the IRS requires you to use accrual accounting if your restaurant’s income is over $25 million.

Cash accounting

The cash accounting method is a simpler way to do accounting for your restaurant. With this method, you record income when you receive it and expenses when you pay them. 

This method has a shorter learning curve and works when you have fewer items to record since it’s easier to track revenue and expenses. However, it only provides a short-term vision of your financial situation since it doesn’t consider accounts receivable and accounts payable. 

Accrual accounting

The accrual accounting method records income and expenses when you earn or bill them, even if you haven’t received or spent the money yet. Although It can be more complex to work on, the accrual method is the most widely used.  

This method is usually best for restaurant accounting because you have to regularly track your inventory, and it gives you a more accurate view of your financial situation. 

How to do accounting for a restaurant in 5 steps

Now that you understand the accounting concepts and which figures to track, you can start crunching the numbers. Here’s how to do accounting for your restaurant:

1. Record your financial transactions

The first step is to record and keep track of your restaurant’s financial transactions, including expenses, sales, and payments. Make a habit of tracking in real-time any transactions you make and spend time at the end of each day to document them. 

Ensure that you keep all receipts and invoices organized and record your transactions accurately. For this step, it can be helpful to hire a bookkeeper to do this for you so you can focus on other parts of your business. 

2. Use accounting software

Whether you hire a restaurant accountant or do it yourself, it’s important to invest in accounting software to streamline the process. Consider software that has specific functionality for your restaurants and integrates with your restaurant management system.

Here are some accounting software options to consider:

• QuickBooks: simplified accounting for restaurants that lets you monitor your transactions, create customized reports, and capture delivery orders and supply pickup trips. 
• Restaurant365: restaurant management software with accounting functionalities, including sales and labor data, daily journal entries, and expense tracking tools.
• MarginEdge: another restaurant management software that helps you manage food costs, track inventory, and automatically export sales and labor data into other accounting software.

With restaurant accounting software, you can create financial statements, like income statements, cash flow statements, and balance sheets. Which provides a snapshot of your restaurant’s financial health so you can make informed decisions about pricing and budgeting. 

3. Set up a chart of accounts

Next, set up a chart of accounts, which is a system that organizes your restaurant’s accounts into categories, such as assets, liabilities, income, and expenses. 

You can break these categories into subcategories to provide a more digestible breakdown of your financial transactions, such as food and beverage, marketing, and labor costs. A chart of accounts makes it easier to locate specific accounts to identify trends, generate accurate financial statements, and make improvements.  

4. Pick a point-of-sale system

After setting up a chart of accounts, you should pick a point-of-sale (POS) system to process your restaurant’s transactions and streamline your operations. The POS system usually includes an electronic cash register and a software system that tracks purchases daily. 

It’s important to get a user-friendly system that meets your restaurant's needs and integrates with your accounting software. A POS system helps you automate tasks such as tracking inventory, creating sales reports, processing customer orders, and employee tips. 

5. Analyze your financial data

The last step is analyzing your financial data to budget and plan for the future. Plan to analyze your financial data weekly and for each period, and work with your accountant (if you have one) to set financial goals and develop strategies to achieve them. 

For example, you can set a goal to reduce expenses or increase revenue. You can use your financial data to budget and plan your restaurant’s long-term success. 

Outsourcing vs. in-house restaurant accounting

Whether you're not the best with numbers or want to focus on the food, you might be wondering if you should do restaurant accounting in-house or outsource it. 

When outsourcing bookkeepers or accountants, you’ll hire an external company to take care of your restaurant accounting, which includes a couple of benefits:

• More expertise: Restaurant accountants are experts in the area and specialize in managing restaurant finances, which gives you more accurate records.
• Saves money: You won’t need to hire them full-time, provide office space, or invest in accounting software since they usually have that already.
• Saves time: Gives you more time to focus on managing your restaurant instead of doing accounting or overseeing an accountant.

On the downside, outsourcing accounting for your restaurant could lead to communication lapses, especially if they’re in a different time zone or city. You’ll also give them your financial information, trust their financial decisions, and might have to pay a higher price upfront.

If you’re considering in-house restaurant accountants, there are also some benefits: 

• Better communication: You can easily communicate with them as they’ll likely work in the restaurant or mainly with your business. 
• More control: You’ll have more control over the financial information and can help make decisions. 
• More flexibility: You’ll have more control over their pay and they’ll be part of your team.  

However, in-house restaurant accounting has some drawbacks, including that they might not be an expert in the area, or you might have to look for someone who specializes in restaurants. You’ll also have to pay for benefits, training, and accounting software. 

Mistakes to avoid when doing restaurant accounting

There are many moving pieces when it comes to accounting for restaurants, which leaves room for error. Try to avoid these mistakes when accounting for restaurants: 

• Forgetting to keep track of your financial performance: Build a habit of tracking and analyzing your financial information weekly or daily so you can catch errors early on. 
• Entering wrong values: Double-check you’re recording the correct information or invest in software that will integrate your POS system and bookkeeping to avoid making mistakes. 
• Picking the wrong accounting period: Choose a method that will allow you to more accurately compare your accounting periods.  Generally, the best accounting period for restaurants is the 4-4-5 method. 
• Not hiring the right accountant: Before hiring an accountant or bookkeeper, ensure they have restaurant experience or enough experience to handle restaurant accounting and make the appropriate decisions.
• Not recording inventory properly: Ensure you accurately record your inventory daily or weekly to allow you to properly balance your inventory levels and reduce expenses. 

Accounting mistakes happen just like overcooking a steak or delivering the wrong order. By tracking your financial statements and recording transactions daily, you can catch them early on and avoid making mistakes in the future. 

Streamline your accounting and save time

Doing restaurant accounting can be as rewarding as creating your favorite recipes when you do it the right way. Keeping track of your financial situation helps you make better financial decisions and future-proof your business. 

Simplify accounting for restaurants with QuickBooks so you focus on the food while getting more accurate results.