Special Requirements of Accounting Services for Restaurants

Accounting is a necessary evil for most business owners – they understand that optimal cash flow requires accurate accounting, but they are often unsure of their own abilities when it comes to keeping their books. ​Even business owners that outsource their bookkeeping and accounting functions still need to understand accounting principles and practices to oversee the work that is being done on their behalf. 

Most entrepreneurs struggle with at least some aspects of accounting best practices, such as:

• Cost of goods sold (COGS) calculations 
• Expense category utilization 
• Cash flow management
• Payroll withholdings
• State and national tax filings
• Financial reporting
• Long-term financial planning

However, restaurateurs tend to have even more difficulties with these because of the special accounting requirements and constraints that pertain solely to their industry.  

Less financially savvy restaurant owners find that doing accounting for a restaurant is complicated by nuanced industry-specific intricacies such as: 

Daily Expense Reporting  
Most small businesses do not need to look at their sales and expenses each day, opting instead to view them on a weekly or monthly basis. However, restaurants need to know how much they sold and how much they comped each day to inform ongoing purchase decisions and make future sales projections. The daily expense report will provide information on food and drink sales, tax collected, tips received, credit card fees charged, coupons used, discounts issued, and gift certificates redeemed. While a retailer may have many of these same categories to account for, the addition of gratuities complicates matters significantly for restaurants.  

Tips & Gratuities  
The biggest mistake that accountants and auditors see when they analyze the books for a restaurant is mishandling of tips and gratuities. The reason for this is that individual server tips are handled differently than automatic gratuities.  

From an accounting perspective, automatic gratuities for things like catering services or large private parties are not considered tips because they are meant to cover not only food service but also transportation costs, food setup, and other items. Automatic gratuities are added at the point of sale, and therefore classified as a service charge because customers cannot choose the dollar value amount themselves. This may seem like a clear-cut distinction, but the common practice of pooling tips complicates matters. When tips are added to a single total and then divided among all servers on that shift, they are no longer categorized as a tip. Understanding what is considered a tip and what is not is vital for restaurateurs.  

The IRS specifies that a tip must be optional, able to be of any value that the customer chooses, non-negotiable, and have the right to be directed toward a specific person. If these four criteria are not met, it cannot be considered a tip.  

The difference between tips and automatic gratuities is not simply a matter of semantics. The two are treated differently for accounting purposes. Tips should not be counted in the restaurant’s revenue, while automatic gratuities are considered a part of revenue.  

Furthermore, tips are not considered to be employee wages. Instead, they are classified as employee income. As such, employee tips are not subject to withholding. This distinction is why it is so vital that tips be reported to employers so that both employers and employees can pay taxes on earnings correctly.

Occupancy Expenses 
Across all industries businesses must calculate operating expenses, but restaurants also have occupancy expenses. Occupancy expenses are fixed costs associated with the restaurant’s location, such as rent, property taxes, insurance, and utilities. While other businesses with physical locations also have occupancy expenses, restaurants are more likely to have their occupancy expenses comprise a larger component of their overall expenses. Restaurants in premium locations will have very high rent costs, and their insurance costs are inherently going to be higher than their retail counterparts. Significant changes to occupancy expenses, like rent increases or insurance premium increases, can substantially affect a restaurant’s balance sheet.   

Cost of Goods Sold (COGS) Calculations 
All business owners should be tracking COGS because it is a metric that concerns both product pricing and inventory. However, restaurant owners need to pay special attention to COGS because controlling food/beverage costs and inventory levels is so important for sustainable growth and long-term success. An accurate COGS calculation is essential for setting menu pricing to ensure each dish is profitable. It is all too common for restaurateurs to estimate the costs of ingredients or overlook packaging costs on to-go and delivery orders, dangerously skewing COGS calculations.   

Prime Cost Tracking 
Prime cost is an essential KPI for restaurateurs that is calculated by adding COGS and labor costs. Prime cost makes up the largest part of a restaurant’s expenses because food costs and payroll expenses are so significant in the food and beverage industry. Tracking prime costs provides ongoing cost monitoring related to food and labor on a daily and weekly basis, allowing restaurant owners to identify increases immediately. Understanding and managing these numbers is critically important because this expense category is what makes or breaks restaurants. Utilizing a professional accountant can provide the financial advice needed to control these variable costs and increase profitability.  

While prime cost is a common KPI in the restaurant industry, this metric is proportional to the restaurant’s size, which means it can be used to gauge an individual restaurant’s health but cannot be used as a comparison to restaurants of other sizes. Therefore, to provide an effective comparison across the industry regardless of size, the food cost-to-sales ratio is used. This figure compares food costs to food sales regardless of overall sales volume so that an individual restaurant can use overall industry benchmarks to make an effective comparison.  

Paper Invoices   
While most restaurants have switched over from paper invoicing for suppliers, some smaller restaurants and legacy restaurants have yet to digitize. Using an electronic POS system that is integrated with restaurant management software provides real-time reporting and automated digital invoices for easy ordering. The result is increased operational efficiency, improved cash flow, and reduced food waste.    

Restaurant owners trying to do their own accounting often find that they not only lack the time but also the expertise needed to do so effectively. The intricate nuances of restaurant accounting require a full-time professional. However, these accounting demands are too sophisticated for a general bookkeeper due to the specialized IRS requirements and increased reporting needs.

Hiring an accounting company such as ASP or an in-house accountant with experience in the restaurant industry is the surest way to ensure future profitability.  

If you need help with your unique type of business, we have a very experienced team to help! Contact Eric or Todd today!