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6 Min. Read

Accounting for Restaurants: A Step-By-Step Guide

Accounting for Restaurants: A Step-By-Step Guide

Effective accounting for restaurants is one of the most important aspects of making your business successful. Since the profit margins in restaurants are slim, it is important to keep a watchful eye on the bookkeeping process.

What makes restaurant accounting unique is the language of hospitality finance. For efficient accounting, you need to understand the ins and outs of how the food and beverage industry.

What this article covers:

NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you need income tax advice please contact an accountant in your area.

How to Do Bookkeeping for a Restaurant

Setting Up Your Books

1. Find the ideal bookkeeper

As an owner, you know the challenges of running a restaurant such as dealing with staffing, inventory management and controlling the cost of goods sold. It is important to find a bookkeeper who understands the complexity of the food and beverage industry, both front-of-the-house operations and back-of-the-house management.

2. Use an accounting software

Choose an accounting software to streamline your data entry tasks, create customized invoices, track your revenue, create regular profit and loss statements and review your cash flow. The ideal bookkeeping software for restaurants should offer robust reporting features, be easy to use and allow you to access data anytime, anywhere.

3. Set up the chart of accounts

The next step is to set up your chart of accounts which is used to categorize the money flowing in and out of your business. A standard chart of accounts includes assets, liabilities, expenses, revenue and owner’s equity.

This is further broken down into business-specific categories such as inventory, sales and marketing. While setting up the chart of accounts, it’s important to decide the metrics you want to monitor.

4. Choose a POS system

Whether you’re running a small bakery or a fine dining restaurant, you would need a POS system for cash management, sending receipts via text or mail, inventory management, order management and back-office reporting.

Choose a system that is easy to use for employees and customers and that ties in with your accounting software.

What You Need to Track

  • Payroll

Payroll in the restaurant industry can be challenging as the process of tracking employee hours is complex. Multiple wages and staff positions are the norms in the restaurant industry and the ability to accommodate different rates is key.

According to the National Restaurant Association, there are 14.7 million people in the restaurant industry. Ten percent of the workforce in the United States is made of restaurant employees and most of these employees are hourly and part-time staff.

With irregular work hours, multi-positions and different types of pay, calculating restaurant payroll can be a hassle. It is best to outsource the payroll function or use a payroll software to do the work for you.

  • Accounts Payable

Paying your bills on time and keeping your vendors and suppliers happy is essential for the efficient functioning of a restaurant. The accounts payable represents the amount you owe the suppliers.

Once you receive invoices, update them on the accounting software. This will help you keep track of the payment schedule.

  • Inventory

Based on the size of your restaurant, you can set up an inventory management system that optimizes food costs and reduces waste. The inventory also helps you avoid food shortages and surpluses.

Track your consumables and supplies to calculate the value of the food you have in stock and determine the average daily inventory costs.

  • Cash Management

Monitor your cash flow, which refers to the amount of cash coming in versus the amount of cash going out of your business on a daily, weekly and monthly basis.

  • Sales

Keeping track of your revenue is important to restaurant bookkeeping. Use the accounting records on hand to show how much you earn from food sales, merchandise sales, or catering jobs. Find out how much revenue you make each day and ideally break them further into food and beverage categories.

  • Reconciliation

You must reconcile all of your accounts, including bank accounts, loans, credit cards, lines of credit and even your payroll liabilities. Reconciling will ensure that you’ve accounted for everything.

Reporting and Analysis

Here are some key ratios to consider when reviewing the financial statements of your restaurant, specifically your weekly and monthly income statements.

  • Food Costs

The cost of preparing the item on menu divided by the total revenue from the item. This ratio is used to ensure that you’re making the profit from each menu item.

How to calculate:
Food cost / Total sales x 100

  • Prime Costs

Prime cost is a summation of all your labor costs and your cost of goods sold. Paying your restaurant staff, including front-of-office staff and kitchen crew, are part of your labor costs. It also includes benefits, payroll taxes, etc.

Ideally, labor should be less than 30 percent of the revenue. Depending on the type of restaurant you run, though, costs may be higher or lower. To evaluate the costs, divide the staff into groups of kitchen staff or managers to see which group is costing you more.

How to calculate:
Labor + Cost of goods sold

  • Overhead Rates

Overhead rates are fixed costs of running your business such as rent and insurance. It is calculated on an hourly, daily or monthly rate. This will give you an insight into how much your business costs to run.

How to calculate:
Total fixed costs/ Total operating hours

  • Cost of Goods Sold

The cost of goods sold represents the inventory at a given time. It helps you understand how much you’re spending to make the food.

How to calculate:
Beginning inventory + purchased inventory – final inventory

  • Gross Profit

After the payment of all business-related expenses, the amount of money leftover at the end of every month is your gross profit.

How to calculate:
Total sales – total expenses

What Is Cost of Goods Sold in a Restaurant?

In the restaurant industry, the cost of goods sold refers to the supplies and ingredients that are used to make the items on the menu. COGS is determined by the following equation:

Beginning inventory + purchased inventory – final inventory

The beginning inventory is the amount of food that you have in your kitchens and your storage rooms at the beginning of the period while purchases refer to the inventory you purchase in food and beverage orders in that period of time. Final inventory is the amount of food product you have left when the work week is over.

For example, if your restaurant has $3,000 worth of inventory on hand at the beginning of the week, and you purchase another $2,000 of food products, you have $5,000 worth of inventory. The next week you count $2,000 worth of inventory. This gives you a COGS of $3,000.

Choosing accounting systems for restaurants can help you eliminate the difficulty with restaurant accounting and help you manage your food costs easily. Most of these systems include financial software and point of sale (POS) systems to help you organize inventory count and execute transactions quickly.