What Is Restaurant Accounting and How to Do It Right?

Stay updated with current accounting standards, business compliance, tax preparation tips, and latest news.

    13 Dec 2024
    Ever feel like your restaurant’s finances are spinning out of control?  Between tracking food costs, managing payroll, and keeping an eye on profits, it can feel like you’re running on fumes just to stay afloat. If you’ve ever wondered how successful restaurants stay on top of their numbers, continue reading. Good accounting is the backbone of any thriving restaurant and it’s not as complicated as you might think.  Key Takeaways:
    • Track key metrics like food and labour costs weekly to ensure profitability and efficient operations.
    • Reconcile accounts monthly to catch errors early and maintain accurate financial records.
    • Partner with an accounting firm for outsourced restaurant accounting services to save time and ensure accuracy.
    Let’s break it down together so you can get your finances sorted and focus on what you do best: serving great food.  

    What Is Restaurant Accounting?

    Restaurant accounting isn’t just about balancing the books, it’s a tailored approach to managing your finances specific to the food and beverage industry. Unlike general accounting, it focuses on key areas like tracking food and labour costs, managing tips, and ensuring compliance with industry regulations. It’s about knowing where your money is coming from and where it’s going so you can make smarter decisions. Working with expert restaurant accounting professionals can help you navigate these unique challenges and ensure your restaurant’s financial health stays strong.  

    Why Is Restaurant Accounting Important?

    Proper accounting gives you a clear picture of your business’s financial health. Here are some points that make restaurant accounting so important:
    • Better Decision-Making: Want to know if your menu prices are on point? Or if it’s time to cut back on staff during slower hours? Restaurant accounting can give you access to the actionable data you need to make the right decision.
    • Improved Cash Flow: Restaurants run on tight margins and accounting can help you manage your inflows and outflows allowing for improved cash flow for your restaurant.
    • Regulatory Compliance: From payroll taxes to health benefits, accounting can help you stay compliant and avoid costly penalties.
    • Scalability: Restaurant owners can highly benefit from accounting as it allows them to scale their business by keeping the finances in order and giving opportunities for better investments.
     

    Key Components of Restaurant Accounting

    In terms of restaurant accounting you will need to focus on the below metrics: important restaurant accounting metrics to track
    1. Cost of Goods Sold (COGS): This is what you spend on ingredients and supplies, tracking them is necessary as it will help you stay profitable in the long run.
    2. Labour Costs: Managing employee hours, wages, and tips is crucial. It’s often the largest expense after food costs.
    3. Inventory Management: Better knowledge about how much stock you’re holding can help avoid over-ordering, and spoilage.
    4. Revenue Tracking: Keep a close eye on daily sales—your POS system can make this a breeze.
    5. Prime Costs: Add your labour costs and COGS together. This number should be around 55-65% of your revenue. If it’s higher, it’s time to cut back.
     

    Cash or Accrual Accounting: Which Is Best for Restaurants?

    Restaurants can choose between cash accounting and accrual accounting:
    • Cash Accounting: You record income and expenses when cash changes hands. Simple and straightforward, but it doesn’t give the full picture.
    • Accrual Accounting: You record transactions when they’re incurred, even if the money hasn’t moved yet. This method is more accurate but complex.
    Most restaurants benefit from accrual accounting, but the choice depends on your revenue and business model. Working with an accountant for restaurant owners can help you decide.  

    How to Do Restaurant Accounting

    Here’s a step-by-step approach to keep your finances organized:  

    1. Set Up a Chart of Accounts

    Categorize every expense into specific accounts like food costs, rent, utilities, marketing, and payroll. A well-structured chart simplifies tracking and reporting. Example: Separate "kitchen supplies" from "food inventory" to better analyze spending.  

    2. Use a POS System

    A point-of-sale (POS) system streamlines revenue tracking and integrates with accounting software. Choose one that offers features like sales breakdowns and tip management as these features are essential when doing restaurant accounting.  

    3. Track Key Metrics Weekly

    Monitor metrics like food cost percentage, labour cost percentage, and prime costs. For example:
    • Food cost percentage = (Food Costs ÷ Revenue) × 100
    • You can try to keep this under 30% to ensure profitability (This may vary based on the size of your restaurant, your cash inflow, competition, and many other factors).

    4. Reconcile Accounts Monthly

    Match your bank statements with your accounting records to catch errors or unauthorized transactions. Tip: Automate this with tools like QuickBooks.  

    5. Prepare Detailed Financial Reports

    Creating financial reports is extremely important to know exactly where your small business or restaurant is standing in terms of finances and take the next right step based on the data to grow your restaurant. It’s a good idea to start by creating the following:
    • Profit and Loss Statements: These can help you understand your income and expenses better, allowing you to optimize your operations for more profits.
    • Balance Sheets: These sheets will help you track assets, liabilities, and equity.
    • Cash Flow Statements: To avoid liquidity issues it is essential to create cash flow statements to get a better idea of cash inflow and outflows.
     

    6. Schedule Inventory Audits

    Conduct physical inventory checks at least monthly. This helps identify shrinkage, spoilage, or theft. Pair this with software that tracks inventory trends for better insights and automation.  

    7. Budget for Slow Seasons

    Restaurants often face seasonal fluctuations. Use historical data to predict and prepare for quieter months.  

    8. Implement Payroll Management Tools

    Managing payroll and tips manually can lead to errors. Tools like Gusto or ADP simplify compliance and ensure employees are paid on time.  

    9. Leverage Tax Deductions

    Understand the deductions available for restaurants, such as business meals, equipment depreciation, and marketing costs. Keeping detailed records will make tax filing smoother.  

    10. Hire Professional Help

    If managing everything feels overwhelming, consider outsourced restaurant accounting services. Professionals can handle everything from tax compliance to payroll, saving you time and ensuring accuracy. image demonstrating should you hire accountant for your restaurant

    Common Accounting Mistakes To Avoid

    Even experienced restaurant owners can stumble. Here’s what to watch out for:
    • Not tracking daily sales consistently.
    • Ignoring inventory shrinkage due to spoilage or theft.
    • Overlooking cash flow management.
    • Mishandling payroll taxes or tip calculations.
    • Using outdated accounting systems instead of outsourced restaurant accounting services or modern tools.
    Important Update: The recent GST tax break announcement will significantly impact restaurant owners. These updates require a more detailed breakdown of tax calculations, making compliance even more challenging. If you’re not sure how these changes affect your business, consult an accountant for restaurant owners to ensure you’re on the right track and not making any costly mistakes.  

    Best Tools for Restaurant Accounting

    The right tool will make the whole accounting process easier for those who lack the time to do accounting themselves but do not have the required knowledge and experience. Some popular accounting software might include:
    • QuickBooks: A versatile option for small to medium-sized restaurants.
    • Xero: Easy to use and perfect for cloud-based accounting.
    • Restaurant365: Designed specifically for restaurants, this tool handles everything from inventory to reporting.
    An accounting firm in Surrey like CJCPA can help you pick the best accounting software for your needs and ensure everything is set up correctly.  

    Why Partner with CJCPA for Restaurant Accounting Services?

    When it comes to managing your restaurant’s finances, you don’t have to go it alone. CJCPA offers outsourced restaurant accounting services that take the stress out of accounting. From tracking expenses to creating custom financial reports, we’ve got your back. With over 30 years of experience working with restaurants just like yours, our team knows how to help you stay profitable and compliant. Contact us today to learn more about our restaurant accounting services personalized to your restaurant business.
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