Restaurant Accounting: The Ultimate Guide

We’ve all seen it happen. The best restaurant in town—the one with delicious food, a terrific ambience, engaging servers, and a packed dining room—shuts down, much to the bewilderment of loyal patrons. Although this can happen for multiple reasons, one of the most common is a lack of attention to the financial aspects of the business. Even restaurateurs who hire professionals to handle those matters need to understand the basics of profit and loss and sales and expenditures to make smart business decisions.

What Is Restaurant Accounting?

Restaurant accounting encompasses all financial activities of a restaurant or restaurant group, from accurately recording purchases and ongoing expenses to creating financial reports that allow owners to make decisions quickly based on up-to-the-minute information. This view into the overall performance of a restaurant makes it possible to analyze and interpret key aspects of the business, such as costs, revenue streams, and cash flow.

Restaurant Bookkeeping vs. Restaurant Accounting

For the most part, restaurant bookkeepers record and code general ledger transactions (such as money spent on supplies or income from customers), handle payroll, manage accounts payable and receivable, and create financial statements. Restaurant accountants are responsible for a lot more, including analyzing ledger entries, reconciling bank statements, assessing inventories, conducting audits, and interpreting financial statements. A good accountant will also provide restaurant leaders with advice on funding growth opportunities, optimizing tax strategies, and other financial matters. In short, the bookkeeper’s role is focused on accurately recording financial transactions, while the accountant is responsible for analyzing and interpreting data for restaurant owners and general managers.

Key Takeaways

• Choosing the right financial key performance indicators (KPIs) will help restaurant leaders make more-informed decisions about refining or changing current practices and mapping out future plans. Tracking too many KPIs can cause information overload.
• Restaurants need to assess their inventories more frequently than retailers, manufacturers, and other companies do—as often as daily—to ensure that food is fresh and that enough is on hand to fulfill customer orders.
• Restaurants with less than US$1 million in revenue can opt for cash accounting, but accrual accounting provides a more accurate view of a business’s financial status.

Restaurant Accounting Explained

Restaurant accounting involves the tracking of cash flow and inventory, with the goal of providing real-time data to help restaurateurs track the financial health of their establishments. Among the goals: make adjustments based on labor and food costs and other factors; assess customer demand and the status of inventories; and report data to management or the authorities. Thorough accounting also lets restaurateurs assess the potential of new revenue opportunities, such as third-party delivery, online ordering, and takeout. A restaurant accountant should be able to create detailed financial reports, provide financial advice, complete tax returns, help create budgets, and audit financial records.

Businesses such as retailers and manufacturers may assess inventories weekly, monthly, or quarterly, but restaurants may need to do that daily, given that food can spoil and demand can shift rapidly. In such a cash-intensive industry, measuring cash flow is often crucial for efficient working capital requirements management. Accountants need to be able to use data from the restaurant’s point-of-sale (POS) system to predict inflows so that management can identify the best time to make capital expenditures (say, for new kitchen equipment or outdoor seating) and when to pull back on expenses. They need to keep accurate and up-to-date financial statements so that restaurant owners have they data they need to attract investors or line up bank financing. Restaurants also have to handle tips in compliance with income reporting laws.

The most important tool in accountants’ arsenal is the software they use. Small restaurants may be able to start with spreadsheets or rudimentary off-the-shelf financial software packages. But if owners want access to financial, inventory, staffing, and other kinds of data to help them grow their businesses, they need the end-to-end visibility, banking system integration, robust reporting, and automated inventory management of higher-end cloud-based application suites. Restaurateurs also need to ensure that they have the right processes in place to enforce financial best practices.

For example, leaders should track KPIs such as their COGS (cost of goods sold) ratio against gross revenue. For most restaurants, a good average COGS ratio is 30% to 35%, according to Restaurant Owner and Manager Magazine, though this percentage can fluctuate depending on consumer demand and changes in the cost of ingredients. Managers need to be prepared to make quick adjustments to menu items or prices to ensure that they can continue to maintain a healthy COGS ratio even when costs increase. Another opportunity for operational improvement is to compare two restaurants with similar volume but different ingredient or labor costs, to identify best practices and benchmarks that can lift all boats.

Benefits of Restaurant Accounting

The benefits of comprehensive restaurant accounting practices are clear, especially in an industry where profit margins range from a slim 3% to 5% for full-service restaurants and 6% to 9% for fast casual restaurants, which typically have lower labor costs and faster customer turnover, according to job site Indeed.com.

Better financial management

Tracking financial performance is key—you can’t improve what you’re not measuring. For example, if cash flow numbers are trending downward, restaurant managers can reduce expenses, seek more favorable payment terms with vendors, adjust menu prices, or promote an attractive new offering. Rigorous financial tracking makes it easier to develop accurate budgets that provide a roadmap for future revenue opportunities. The experience of a US Midwest fast food chain makes this clear. Before implementing a cloud-based financial system, the company’s 15 restaurants and warehouses were using 15 different QuickBooks instances. With the new software, company leadership can now easily compare financial data from each entity and establish benchmarks and best practices.

Improved inventory management

Accurately tracking inventory—determining whether the food and ingredients on hand are still usable and there’s enough of them to meet customer demand—is crucial to both the financial health of a restaurant or chain and to providing good customer service. Consider that the average restaurant loses 4% to 10% of the food it purchases due to spoilage and waste, according to a 2023 National Restaurant Association survey, and 92% of operators say the rising cost of food is a significant concern. Some industries can assess their inventories weekly, month, or quarterly, but restaurants may need to do so daily or every couple of days to ensure that ingredients are fresh and they don’t sell out of high-margin items. And on the other end, analyzing their inventory turnover may show that they can free up cash by reducing overstocking.

More accurate reporting

Accurate, up-to-date reports on profit and loss, cash flow, and assets and liabilities provide restaurateurs with the information they need to understand how their business is performing, so that they can take corrective measures when the numbers show that the business is falling off. An Australian fast casual restaurant chain with more than 140 locations was trying to get a handle on millions of transactions using Microsoft Office applications. Replacing that rudimentary software with a cloud-based business management system allowed franchise leaders to view the accurate and up-to-date financial data they needed to enter new regions and meet their growth objectives.

Simplified tax accounting

Tax audits are relatively rare. Less than 0.1% of all 2019 small business tax returns in the United States were audited, according to the US Internal Revenue Service, while in Japan 2.5% of businesses were subjected to an audit in 2020, according to the country’s National Tax Agency. But when audits do happen, they can be highly disruptive. Maintaining accurate accounts and enlisting tax advice from an accountant with experience in the restaurant industry are the best ways to avoid drawn-out auditing processes. Some small-business owners shift from cash-basis accounting to accrual accounting, which requires an extensive overhaul of how they record transactions and recognize revenue and expenses.

How to Manage Restaurant Accounting

The best way to manage and oversee restaurant accounting is to make sure that you’re running the right reports and taking the time to review them. If your business is resting on a foundation of sound accounting practices and you’re using flexible, robust accounting software, you’ll be able to see where your business is financially and use that knowledge to make timely decisions.

1. Hire the right accountant

The demand for proficient accountants is high. Robert Half’s 2024 Salary Guide notes that companies are experiencing an accountant shortage, resulting in hiring issues and increased workloads that can lead to employee burnout. But a well-run restaurant can’t settle for a general accountant or accounting firm. It needs people experienced with the unique demands of restaurants, including handling tip reporting, daily or weekly inventory reports, and a sometimes volatile labor force, as well as expertise with accounting software designed for the restaurant industry. One way to attract and retain accounting staff is to invest in software that automates mundane tasks and provides a comprehensive set of report options so that accountants have more time to provide financial advice and support new ventures.

2. Run the right reports

Accounting reports are crucial, both to support quick pivots in response to rising costs or demand, and to inform long-term planning around expansion, whether that expansion is focused on new offerings and sales channels or new restaurant locations. Types of reports include income statements (P&L), balance sheets, and statements of cash flow, including total customer payments and any deductions (usually from comped items or coupons). KPI reports are particularly useful for chains with multiple locations that want to compare the performance of each restaurant. (See below to learn more about the top restaurant KPIs.)

3. Use financial data to inform and direct decision making and forecasts

Timely financial data helps restaurants respond to fluctuating costs, changes in dining patterns, and short-term variables. But equally important, it can also support longer-term planning, whether that’s exploring new delivery channels, figuring out new ways to attract patrons, or mapping out an expansion strategy. For example, some restaurants are setting up ghost kitchens in out-of-the-way (and less expensive) locations for delivery-only offerings, while others are starting franchise operations.

Restaurant Accounting Methods

Restaurants run by owner/operators are more likely to use the cash method of accounting, while restaurants or restaurant groups with more structured ownership will almost always use the accrual accounting method. (In the US, companies with $25 million in revenue or more are required to use accrual accounting.)

Cash accounting

With the cash accounting method, businesses record revenue when they receive payment from customers and deduct expenses when they’re paid. For example, a restaurant may order and receive food supplies in October, but if the restaurant’s vendor allows it to delay payment for several weeks, the cost of the supplies may not appear in the restaurant’s books until November when they make the actual payment. Restaurants are more likely than most other businesses to deal with large amounts of cash, so this is the preferred method for those with less than $1 million in revenue. Cash accounting is simpler than accrual accounting, but it can also be misleading because it doesn’t show future expenses, such as payroll for staff hours that have already been worked or money still owed from a customer for an event that has already taken place. For payroll accounting, using the cash accounting method means that payroll costs are recorded when employees receive cash or any other kind of money transfer, even though the work was performed at an earlier date.

Accrual Accounting

With the accrual accounting method, businesses record revenue and expenses when the associated event that generates revenue occurs, or when the revenue is earned, even if that’s before they make or receive payments. This involves adding accrued expenses, such as salaries that are owed because staff members have worked the hours but won’t be paid until the next payroll run, which may take place after the end of the tax period. For example, a restaurant that closes for a private party would need to record all of that revenue at the time of the event, even if the contract is signed earlier and the customer doesn’t pay most of the bill until after the event takes place, and any deposits would need to be recorded as unearned revenue until the event. Conversely, a restaurant would record a COGS expense when, for example, it prepares food and beverages for the party even if it is able to postpone paying its vendors until after full payment comes in from the customer. One effect of the accrual accounting method is that the restaurant may at times have to pay taxes on revenue that it has not yet received, but this would also be offset by recognizing expenses before they’re actually paid. Accrual accounting provides a better view of a restaurant’s overall financial condition.

Choose the Right Accounting Method

Businesses with more than US$25 million in gross receipts over the previous three years must use the accrual accounting method. Businesses that don’t meet that criterion can use the cash method, which works well with relatively small inventory levels. Cash accounting is easier to manage but can give restaurant owners a misleading view of the health of their operation, as income can be recorded before expenses are actually paid. Most small, cash-intensive restaurants and bars opt for cash accounting, but as they grow they may choose to switch to accrual accounting to ensure that they’re capturing and communicating, through regular financial reports, the added complexity of a larger operation.

Restaurant KPIs to Measure

KPIs are the easiest way for restaurants to measure and track their financial performance and take corrective actions if they’re heading off course. Six categories of KPIs are most useful for them.

Sales

Sales KPIs measure how closely sales numbers are tracking to predetermined goals. The break-even KPI measures the sales volume required to make back an investment, such as in a new location or new piece of equipment. The gross profit KPI measures the amount of money the restaurant makes after subtracting the total cost of goods sold. The historic sales KPI shows how a restaurant’s sales numbers are tracking doing over time, so that restaurateurs can identify trends and improve forecast accuracy.

Labor cost

The labor cost KPI helps restaurateurs track employee costs at the individual or group level, as well as measure labor cost trends during busy times of the year and compare those costs to sales. To calculate labor costs, employers add together not just compensation, but also the cost of benefits, payroll taxes, and workforce overhead, which can include IT and administrative expenses, recruitment costs, and costs related to employee events.

Cost of goods sold

The COGS KPI represents the total amount a restaurant spends on the food, beverages, and ingredients needed for its menu items, or on merchandise, including branded items such as t-shirts, glasses, and prepackaged food. The COGS expense ratio is as follows: COGS/net sales x 100. A low COGS ratio indicates that business costs are low compared to sales, so profits should be higher.

Prime cost

The prime cost KPI is the cost of goods sold plus the cost of labor, including all salaries and benefits. Restaurateurs use this number to benchmark controllable costs—so called because they can reduce these costs by removing menu items, changing ingredients, and/or reducing staff levels.

Turnover rate

The turnover rate KPI describes a couple of different measurements. Staff turnover is the rate at which staff leave and need to be replaced. Although usually calculated annually, organizations may also want to track this KPI more often for specific job roles or teams that need extra attention. The table turnover rate measures the total number of parties served divided by the number of tables during a given period of time.

Server benchmark

The server benchmark KPI, a productivity measure, is calculated by totaling the number of guests a server handles in a given hour. This metric indicates to restaurant managers whether a server might need additional training or whether another server needs to be assigned to a section to ensure that patrons are catered to in a timely manner and that the restaurant can maximize its traffic.

How to Avoid Common Restaurant Accounting Issues

Accounting errors are unavoidable. Busy servers may enter the wrong information in the POS system, or accountants may accidentally double count certain expenses. Here are four of the most common errors and how to prevent them.

1. Data entry errors

Basic data entry errors include transposed numbers, misplaced decimals, and incorrect POS system entries, errors that can snowball when using manual accounting processes. The latest cloud-based accounting applications include error-reducing features, such as automated payment processing and bank account reconciliation. It’s also important to give front-of-house staff proper training on the POS system.

2. Errors of commission

Errors of commission result from a wrong action—for example, a transaction is recorded but assigned to the wrong account, an entry is accidentally duplicated, or debits and credits are accidentally switched. A bookkeeper might commit an error of commission by entering the correct amount but as a debit rather than a deposit, or entering an amount into accounts payment but attributing it to the wrong vendor account. These are sometimes referred to as clerical errors. Some accounting applications apply specified policies to every accounting action, limiting errors of commission.

3. Errors of omission

Errors of omission occur when a transaction isn’t recorded. Failure to record a payment to a vendor or the purchase of a new piece of equipment are both examples of errors of omission. Another type is called a partial error of omission—for example, when goods are purchased from a vendor then returned but only part of the transaction is recorded in the accounting system. Well organized records and retention of all financial documents—purchase orders, receipts, bank statements, and the like—can help an accountant bring to light errors of omission. The ability to easily compare transactions across a period of time will often reveal payments or income that should be similar from month to month, and regularly reconciling the restaurant’s books with relevant documents are some of the best ways to mitigate errors of omission.

4. Errors of principle

Errors of principle occur when the wrong accounting treatment is used for a transaction, resulting in a deviation from generally accepted accounting principles. One example is incorrectly categorizing an item as an asset when it should be categorized as a liability, raising a red flag to an auditor.

How to Choose a Restaurant Accounting Software Vendor

Restaurants should work with their in-house or third-party accountants to identify the best financial applications for their needs and choose a vendor that will work closely with them during implementation. When you meet with a potential vendor, go in with a list of requirements. Put a priority on cloud-based applications providing anywhere/anytime access and quarterly feature updates. Also important are built-in data analytics and reporting dashboards that pull out key KPIs.

Invest in Business Growth with NetSuite

Restaurateurs don’t get into the business because they love numbers, even if close tracking of the numbers is key to their success. Spreadsheets and off-the-shelf accounting software packages may seem like the simplest solutions, but they generally lack key analytics and reporting features and don’t scale well with a growing business. Restaurants are increasingly choosing feature-rich, scalable, easy-to-manage cloud-based accounting applications purpose-built for the industry.

An industry leader is Oracle NetSuite for Restaurants, a suite of cloud-based accounting applications with POS integration, role-based dashboards and reports, and enhanced data analytics.

Restaurant Accounting FAQs

Which accounting methods do restaurants use?

Restaurants can use cash or accrual accounting methods. Cash accounting, generally used by restaurants with less than $1 million in revenue, lets restaurant businesses record income or spending when cash is received or disbursed. Accrual accounting, suitable for larger restaurants or restaurant groups, records revenue when transactions take place, regardless of whether payment is received or dispersed at that time.

What is accounting in a restaurant?

Restaurant accounting encompasses documenting all financial transactions; generating financial reports, showing cash flow, profit, and loss, inventory on hand, payroll, and other numbers; analyzing the data to improve decision making; and interpreting the data for and providing financial advice to restaurant management.

What are the duties of a bookkeeper in a restaurant?

Restaurant bookkeepers generally are responsible for recording and coding transactions, managing accounts payable and receivable, handling payroll, reconciling bank statements, and keeping track of inventories.

Is a restaurant an asset or liability?

A restaurant consists of physical assets such as equipment, furnishings, and inventory, as well as intangible assets such as brand value and reputation. Other restaurant assets include liquor licenses and franchise contracts. A restaurant can be a liability if expenses consistently exceed revenues and drain cash reserves.