9 Basics of Restaurant Accounting for New Owners

9 Basics of Restaurant Accounting for New Owners
December 2, 2019 Levi Olmstead

Great service or food is only the start of opening a new restaurant. The administrative duties of a restaurant can help the company succeed or cause its demise. Accounting duties help ensure that a restaurant is tracking their costs, profits, and all of the intricacies of finance.

You’ll learn:

Restaurant Accounting Basics for New Owners

Accounting can be tricky. A lot of the time, some of the words and terms seem like an entirely different language. Below is a list of phrases that will often appear during accounting for anyone working in restaurant management.

1. Chart of Accounts

A chart of accounts will categorize the money that is spent and received. The chart of accounts will record all of the top-level transactions such as revenue and expenses, assets and liabilities, cost of goods sold, and equity.

Each top-level transaction will breakdown into more detailed categories such as wages, food costs, alcohol costs, rent, etc.  

2. Balance Sheet

A balance sheet will list all of the assets, liabilities, and equity. Assets are all owned items, including all cash. Liabilities are debt; anything owed to someone else, such as bills and loans. 

A balance sheet will show the equity of the organization – the overall net worth. Subtracting all of the assets from the liabilities will determine net worth. If equity is negative, it means the organization is in debt and owes more money than they have. A healthy organization will find a way to have positive equity, meaning they are profitable. 

3. Cash Flow

Cash flow is all of the money that is flowing in and out of the business in a month. Cash coming in may refer to cash that is coming from the sale of a product or service. Cash would flow out during payment of bills or purchase of equipment or supplies. 

A cash flow report will show an owner how much cash is available on hand at any given moment. Understanding cash flow can help an owner identify if the owner generates enough income to offset their outgoing cash. If more cash is flowing out than coming in, the business may need to seek extra financing. 

4. Daily Sales Report

A daily sales report generates all of the transactions that occurred in a single day. This report compares all the positive revenue transactions against all of the outgoing transactions.

A daily sales report will help a business make decisions to examine how they have done historically, knowing whether they are above or under how they performed last week, month, or year. Examining the daily sales report will help make strategic decisions on staffing, ordering supplies, or even open business hours. 

5. Cost of Goods Sold

Cost of goods sold – sometimes seen written as COGS – is the cost of producing the products sold by the business. The cost of goods sold refers only to the value of the materials and labor. It does not apply to indirect expenses like rent or distribution costs.

The following formula determines the cost of goods sold:

[Begining inventory] + [purchases] – [ending inventory] = Cost of goods sold

The gross profit of a company will determine its profitability and help the organization assess their efficiency in labor and production. 

6. Restaurant Labor Costs

Labor costs are the sum of all wages paid to employees. Wages include the cost of employee benefits and taxes that are paid by an employer. 

Labor costs can be broken down into direct and indirect costs. Direct labor costs refer to the employees that participate in the making of the product, such as a restaurant cashier. Indirect labor costs comprise of staff that support the organization like the janitorial or maintenance staff. 

7. Operation Costs

Operation costs are the required expenses for the day to day operation of the business. Operation costs include the maintenance and administration costs of the company.

 The total of the operating costs includes the cost of goods sold (COGS), operating expenses, and overhead expenses. Subtracting the operating cost from the revenue will calculate the operating income. 

8. Prime Cost

Prime costs are the expenses that are directly related to producing and distributing a product. The prime cost of a product assists in finding where business owners can cut costs and increase efficiencies. 

9. Cost-to-Sales Ratio

The cost to sales ratio focuses solely on the cost of goods sold. The cost to sales ratio is computed by dividing the cost of goods sold by total sales. Many successful restaurants will fall into the 25% – 35% rang for this ratio.

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How to Find an Accountant Expert for Your Restaurant

When a business owner looks to hire an accounting expert, they can either choose to hire a firm, an independent contractor, or an employee. 

The rates for accounting firms can vary based upon seniority. This can give the business owner more control over their expenses as they can request to have a more junior account handle parts of their business. It is essential to research accounting firms to see if they have a history and knowledge of the restaurant industry. 

Hiring an employee can be an option for bringing a dedicated accountant that will know an organization inside and out. If hiring an employee, the business owner will decide if they want an accountant or a bookkeeper. A bookkeeper will be able to handle the smaller tasks, like payroll and accounts payable, but an accountant will be able to provide detailed financial analysis. 

Restaurant Accounting Software

While some restaurant POS systems are equipped with the features with accounting management features, many businesses turn to a more in-depth restaurant accounting software. For many small-businesses, a restaurant accounting software can solve many headaches involved with bookkeeping and financials, while freeing up its staff to focus on food and people management.

Accounting software for restaurants help manage and track all expenses and invoices related to the business, manage income and revenue, logs staff payroll, and handles important tax documents, and more.

The best restaurant accounting software in 2019 includes:

  1. ZipBooks
  2. FreshBooks
  3. TouchBistro
  4. Sage Intacct
  5. Xero
For more info on accounting tools, check out this guide to the best restaurant accounting software in 2020.

Mastering Restaurant Bookkeeping – Next Steps

Managing your restaurant’s accounting will help make your overall restaurant management easier as tax season approaches and your business grows.

Learn how to create a restaurant loyalty rewards program to help increase the revenue of your business today.

Join the 2ndKitchen restaurant network to serve your food in local breweries & bars

Multiply your delivery orders and start earning more revenue with 2ndKitchen – it’s free to get started!