Accounting seems pretty straightforward, for the most part. Right?
Not quite, it takes a lot to know how to manage restaurant accounts.
While the principles of accounting are consistent across business types, the execution is different.
In other words, both a gas station and a bar want to record and analyze all their transactions. But they’ll both have to go about it in different ways based on how their business operates.
It goes without saying that bars and restaurants are unique business types. That makes bar and restaurant accounting unique, too.
What Is Restaurant Accounting?
Restaurant accounting is the practice of recording, summarizing, and analyzing financial transactions in bars and restaurants. In its broadest sense, it’s similar to other kinds of accounting.
But look a little closer and you’ll see a difference. Restaurants have expenses and transactions that are unique to them. And that necessarily makes restaurant accounting unique among the types of accounting.
What Does Restaurant Accounting Include?
Depending on the business, restaurant accounting may include:
- Recording all transactions in a database or spreadsheet
- Labeling and categorizing transactions and expenses
- Analyzing expense reports
- Consolidating and organizing income and bank statements
- Creating financial reporting documents like a restaurant balance sheet
- Monitoring budget adherence and important restaurant KPI
- Conducting an internal audit of restaurant and analysis that generates financial strategies and insights
- Keeping a comprehensive restaurant chart of accounts
It’s a lot to do manually, of course. Which is why bar inventory software is usually the smart move.
How to Do Restaurant Accounting: Restaurant Accounting Methods
Learning how to manage restaurant accounts is all about becoming familiar with two accounting methods. The cash method and the accrual method.
Let’s look into both.
Cash Method of Accounting
The cash method of accounting is when customers pay for products and services rendered immediately. If you’ve ever been to a restaurant, this is obviously how most of them work. The cash method records transactions when the payment is made. That means there are no accounts receivable.
It’s a relatively easy method of accounting because you don’t have to keep track of accounts that owe money. That’s why it’s the most frequently used method of accounting for restaurants.
But there is a disadvantage. It can overstate the health of a business that has a lot of cash on-hand but a lot of debt.
Accrual Method of Accounting
The accrual method records transactions as soon as they happen, whether or not there’s a payment. The primary difference between the two methods is when to record revenue and expenses.
The accrual method typically portrays a more accurate picture of finances. That’s because it includes both accounts payable and accounts receivable. Including both provides a more granular look at long-term financial health.
If a business’s sales are less than $25 million annually, they can choose between the cash or the accrual method. If a business’s sales exceed $25 million annually, they must use the accrual method.
Most restaurants use the cash method, while most other businesses use the accrual method.
Restaurant-Specific Accounting Considerations
Why are restaurants so different? Well, let’s take a look at the unique parts of running a restaurant.
Bars and restaurants need to take inventory way more frequently than other types of business. Some retail companies can take physical inventory monthly, quarterly, or even annually.
Can you imagine a bar or restaurant that took inventory annually? So much would change over the course of a year. Decision-making between inventory periods would use outdated, inaccurate information. It would be a disaster. Sell-through rate would plummet, average inventory would rise. Excess inventory would eat a whole in your profits.
The majority of restaurant and bar inventory is perishable. And the inventory turnover ratio is high. That means it’s changing substantially and constantly. That’s also why perpetual inventory is the best type of inventory management for bars and restaurants.
With perpetual inventory, inventory adjusts after every transaction. That means inventory numbers are always up-to-date and reflect, in real time, item and product levels. Bar inventory software like BinWise Pro makes perpetual inventory a reality for bars and restaurants across the country.
Food Cost Accounting
Food cost, or liquor cost in bars, is an important expense ratio in the context of restaurant accounting. They tell you how much profit is made from a certain menu item. That’s because it’s calculated by taking the cost of all the ingredients needed to make the item once. Then dividing it by how much the item sells for.
Food cost accounting is more complicated than your average restaurant profit margin calculations. Because of the numerous ingredients and labor involved in making the sellable item. But it arguably becomes simpler when using a simpler accounting method—like cash accounting.
P&L or Cash Flow Statements
A profit and loss (P&L) statement is a summary of the costs, revenues, and expenses over a specific period. A cash flow statement is a summary of the cash and cash equivalents entering and leaving a company’s coffers.
Both are practices better done more frequently for restaurants, just like inventory counts.
Frequent P&L and cash flow statements allow a company’s management team to understand their business’s net income and expenses. And that helps them make that most impactful and relevant decisions possible. The more current the information, the more targeted the decision-making.
Restaurant and Bar Accounting Periods
The vast majority of the business world use calendar months—or some derivation like quarters—for accounting periods. Bars and restaurants typically use four-week accounting periods, though.
That’s because bars and restaurants are very dependent on weekends, Fridays and Saturdays specifically. And August in one year may have fewer Fridays and Saturdays than the following August. So it’s better to benchmark four-week periods, instead. See our free profit and loss template for more help.
A prepaid expense is a type of account that shows up on a balance sheet because a business made advance payments for services or goods rendered or received in the future. They’re initially recorded as current assets and their value is expensed over time.
Many restaurants use prepaid accounts for overhead expenses like rent, utilities, bar POS software, bar equipment, and more. There are a lot of unique one-time expenses that bars and restaurants incur that may benefit from a prepaid expense account.
Short Pays or Vendor Credit
Occasionally, a supplier or wholesaler’s delivery doesn’t contain everything on the invoice. Or it may, but some of those items break, expire, spoil, or are low quality.
When that happens you can request a vendor credit. If you subtract the credit from the invoice and only pay what you owe, it’s called a “short pay.” Or you can just pay the full amount and use the credit on your next purchase.
Point is, bars and restaurants need to account for vendor credits and whether or not they’re short paying and when. Accurately keeping tabs on all these credits keeps the risk of vendor dispute low and gives you more clarity into your business’s financial health.
Cash tips for service industry workers are not considered restaurant income and are not subject to withholding. Employees still need to report cash tips—and both the restaurant and employee must still pay taxes on them. But it’s not necessary to report cash tips as restaurant revenue.
All of this adds up to bars and restaurant finances being much more erratic than most other industries’.
What Reports Are Useful for Restaurant and Bar Bookkeeping?
There are a fair amount of reports that help with restaurant accounting, most available if using restaurant and bar inventory software:
- Sales report (daily, weekly, quatriweekly). This is something an bar inventory management platform like BinWise quickly generates for bars and restaurants. All based on historical sales data that’s depleted in real-time. It’s always up-to-date and accurate.
- Prime cost. Using this report will likely release you from the need of running separate COGS and labor cost reports.
- Labor cost
- Operating expenses
- Inventory variance report
And, ideally, you’ve got restaurant accounting software that quarterbacks the whole thing in a centralized dashboard.
Restaurant Accounting Software
Choosing food and beverage accounting software is a big decision. Ideally, you choose one that’s intuitive and easy-to-use, but that offers a full spectrum of financial reporting and analysis.
Good restaurant accounting software will generate:
- Profit and loss statements
- Accounts receivable and payable oversight
- Restaurant and bar staff scheduling recommendations
- Menu planning reports
It should also smoothly integrate with your payroll and inventory management system. And that, in large part, depends on the payroll and inventory management systems you choose. You should also try to find one with an integrated restaurant break even point calculator.
BinWise Pro is an industry-leading beverage inventory management software that streamlines procurement and accounting.
You can place your orders to all your suppliers from anywhere in the world, and track all outstanding orders and products as they’re delivered. Then you can upload those supplier invoices directly into your accounting system and skip the double entry.
Book a demo and we’ll walk you through exactly how easy it all is. We can even recommend some restaurant management books and teach you how to do a swot analysis for restaurant to help you get the most out of your business.