Sales can be entered into the business accounting system in several different ways. The need for reports, and the capabilities of the cash register or point of sale system will determine how much detail will be entered into the accounting system.
If the POS system provides reports to analyze sales, then only a minimum of information needs to be recorded for accounting purposes. On the other hand, if the restaurant uses one or two simple cash registers, it may be beneficial to enter more details to allow for better reporting.
Bookkeeping with a spreadsheet is popular with many small businesses, for several reasons. Primarily, there is effectively no cost for software. While the most popular spreadsheet (Microsoft Excel) is part of an expensive software package, many people have a computer that included a copy pre-installed, plus there are free spreadsheets available such as LibreOffice (the new Open Office), and the online Google Docs.
They also offer unlimited flexibility, and there is no vendor lock in.
That flexibility comes with dangers, however. It is up to the operator to make sure the totals are calculated correctly. Spreadsheets are easy to change, and while critical calculations can be “locked”, it is necessary to make sure that new rows or columns are all being properly accounted for.
Payroll, one of the biggest expenses for restaurants, is an important part of business accounting. The task of recording all the payroll expenses falls under the area of bookkeeping, but the overall payroll process goes far beyond simple bookkeeping.
Adding hours, allocating paid time off, calculating taxes, and applying insurance, garnishment, or other deductions requires management level decisions. Processing payments may require an even higher level authorization.
Once those numbers are calculated, they all need to be recorded in the company books. That is the task of bookkeeping, and can be done at the same level as recording sales and other expenses.
The first issue in recording payroll transactions is that the salary amount is never the same as the payment to the employee, due to the deductions. In a restaurant, there might also be tip amounts that have been received by the company, and added to the employee salary.
Keeping the cost of food under control is a high priority for any restaurant owner. Measuring the actual usage and comparing it to the goal is a critical part of that process.
Many restaurants have a goal for food costs in the range of 30% to 40%. This means that for every $100 in food sales, they expect to spend no more than $40 on food supplies.
Small locations with no significant store room that record all food purchases directly as cost of sales can simply compare expenses to sales. But most locations will record purchases as inventory, and transfer from inventory to cost of sales as the sales occur. This means that they need to transfer some amount of inventory for every set of sales they enter.
In any accounting system, sales revenue, retained earnings, and owner’s equity are normally “credit” accounts. As explained elsewhere on this site, credit accounts have negative balances. This means that total sales and earnings (or profits) are recorded as negative numbers, which sounds counter-intuitive to most non-accountants.
These accounts track how much money the company “owes” the owners. When the owners make an original investment in the company (or shareholders buy shares), the company essentially owes that money back to the owners. When profits are earned, those profits, currently in possession of the company, belong to the owners. The company, from an accounting standpoint, does not own any of its assets. Every bit of value the company holds is all balanced either by a debt, or obligation to the owners.
When cash is received from a customer for a sale, the amount in the “cash” account will be increased. Since every transaction in the accounting system requires balancing positive and negative entries, the amount of cash received must be offset by a negative entry, in this case in the sales account.
Cash flow in any business can vary widely from the profit and loss statement. Many small business owners struggle to understand the differences between them.
The primary activities that create the difference are changes in debt, and changes in the amount of equipment owned.
Borrowing money increases “cash”, but does not help the profit. Paying off those debts decreases cash, but also does not change profit.
Buying large equipment or furnishings (things that will last several years) decreases cash, but does not increase expenses, as least not by the full amount of the purchase. You can only depreciate a percentage of that purchase the first year. In later years, that purchase will continue to be depreciated, which will help profit, even though it has no effect on cash in those years.
Our sample chart of accounts for restaurants has been downloaded many times, so we have made a Quickbooks version of the file available for download for free.
The starting chart of accounts created in Quickbooks when you select the setup option for restaurants is minimal, and does not contain any detail food categories.
We have created two different variations our default chart of accounts in the Quickbooks format, one in a simple list and one that uses a sub-account structure. In the first file format, all accounts are listed without any parent account structure. In the second file, the inventory and expense accounts use sub accounts, so things like “Meat Inventory” and “Produce Inventory” are sub accounts of “Food Inventory” (see the example below).
Debits and Credits are confusing terms to anyone that has not been immersed in accounting for years. Most of us find that they inherently sound like they are applied the opposite from what we expect.
A debit is a posting that increases value in an account. A credit removes value from the account.
A debit adds, a credit subtracts. Does that sound backwards? Perhaps it is due to our experience with banks, where we see money added to our account referred to as a credit, and money taken out referred to as a debit. Those references, however, are from the bank’s perspective, not ours.
Your account at the bank represents a debt that they owe you. If they credit your account, they owe you a little more. The negative balance in their books goes a little farther negative.
A better example is to consider a simple business transaction. If you sell candy bars, and I hand you a dollar, you now owe me a candy bar. By accepting the dollar–adding to your cash account–you created a debt to me. Adding value is a debit.
This is the default chart of accounts we use for Simple Restaurant Accounting. It includes all the accounts we believe the average restaurant will need, and combines some common accounts that are rarely used by smaller businesses.
It has inventory and cost of goods categories broken down by food type, such as meat, dairy, and produce. It also includes multiple bank accounts and credit cards, which help establish the pattern of account numbers.
The 1099-K form is a recent requirement from the IRS placed on merchant account providers and electronic payment processors. These are the companies that set up merchant accounts for small businesses and individuals to accept credit cards.
If the merchant (you, the restaurant owner) receives over $20,000 from 200 or more transactions, the provider must report the total payments to the IRS, and send a 1099-K form to the merchant. Most restaurant owners have already received the form for last year, since they will certainly meet the minimum requirement.
For small restaurants, the cost of food purchases is often tracked directly as Cost of Goods Sold, which is a sub-category of expenses. While many small businesses can get a reasonably accurate calculation of their costs using this method, most locations will get better results by tracking inventory.
When you purchase food, it does not immediately count as an expense in accounting terms. It is considered inventory—an asset—until you sell it. Once you sell the food, it is no longer an asset, and becomes a cost of sales.
If you have a small location with minimal food storage, and at the end of every week you have empty shelves and freezers, you can probably get away with skipping the inventory, and recording purchases as an expense. Because every week, the amount of food you buy is roughly equal to the amount of food you use.
Very few small business owners would list bookkeeping among their favorite activities in running their business. The time dedicated to it seems to take away from the core effort of the business, whether it is a restaurant or any other type of business.
But even beyond the need to file taxes, it is critical that the business owner understand their cash flow and financial position if they expect to remain profitable. For most restaurateurs, there is a minimum amount of bookkeeping they need to do in order to have that information.
The most basic information, of course, is income vs. expenses. Even though that is only one part of the accounting picture, it is the one that is universally important to everyone.