Top 5 Basic Restaurant Accounting and Bookkeeping Mistakes Operators Should Avoid
See the top five mistakes bookkeepers and accountants make when accounting for restaurants, and learn how you can identify and remedy them.
Successful restaurant accounting provides stakeholders with an accurate snapshot of financial and operational strengths and weaknesses. That’s what basic restaurant accounting should do.
Lack of cash flow is a common reason restaurants fail. Razor-thin profit margins require restaurants to have a constant pulse on their financial performance. Operators need at least weekly access to food and labor cost reports, regular insight into cash balance and payables, and daily reconciliations between sales and deposits.
The unfortunate reality is that most operators can’t afford a full-time bookkeeper to track all these items. Many owner-operators skimp on bookkeeping because they don’t see the benefits relative to the costs nor do they fully understand all the requirements and nuances for restaurant finances.
Are your books living up to industry standards? See the top five mistakes made by bookkeepers and accountants when accounting for restaurants, and learn how you can identify and remedy them.
1. Improper posting of POS transactions and expenses
When we tell restaurant operators that their books are currently on a cash basis, they say “but we barely use cash, that doesn’t make sense!”
Cash-basis accounting has very little to do with actual cash. It refers to recording transactions on your Profit & Loss (P&L) statement based on when funds are spent and received.
For example, a deposit from Toast made on Monday for Sunday’s sales will be reported as sales on Monday on the P&L. If UberEats pays the restaurant a week after the sales, then the sales will appear on the P&L a week later. If a vendor is paid in November for October bills, then the entire payment will show up as an expense in November.
Here is a summary of the most common mistakes when recording POS transactions and expenses on a cash basis:
Tips and sales tax are included in the sales
Discounts and comps are not separated on the P&L
Gift cards issued are included in sales when sold, instead of upon redemption
Deposits on events are included in sales when sold, instead of upon redemption
End-of-month payroll accruals are missing from the P&L on monthly reporting
Capital assets are misclassified as expenses
Insurance prepayments are recorded as expenses instead of recognized as prepaid expenses and amortized over the appropriate recognition period
Cash-basis accounting is generally fine for small business tax reporting purposes. However, it’s a problematic approach for measuring restaurant profitability — which is where accrual-basis accounting shines.
Accrual-basis accounting reflects revenue when it’s earned and expenses as they’re incurred.
For example, Sunday’s sales will show up on the P&L on Sunday. Sunday food costs will appear on the P&L on Sunday, instead of whenever the cash is received or leaves the bank account. Any gift cards sold or tips collected on Sunday will show up on the balance sheet as a liability.
This approach enables restaurant operators to understand their profitability, measure food and labor costs as a percentage of sales, and understand the amounts owed in tips to employees and unredeemed gift card balances to customers.
Without accrual-basis accounting, tracking unpaid bills or accounts payable is also not possible.
Accrual-basis accounting provides the most accurate insight into the performance of a restaurant. Cash basis accounting can be used if the goal is to simply track money in and money out for tax purposes.
2. Lack of consistent inventory records
Another common mistake we encounter in restaurant accounting is the failure to record inventory.
If the inventory is not recorded, then the cost of goods sold (COGS) as a percentage of sales will be based on purchases, not usage. This isn’t problematic if there are no alcohol sales and all food inventory is sold the same day it is received.
However, recording alcohol inventory is extremely important to ensure liquor, beer, and wine costs as a percentage of sales are accurate. Most restaurants rarely use all of the alcohol that they purchase on a given day. The importance of this is amplified for wine since many fine-dining restaurants will purchase wine and store it for a long duration.
And the same goes for food, too — especially dry goods, pantry staples, and other shelf-stable ingredients. A five-gallon bucket of pickles is probably going to last across a few different inventory periods. That has to be accounted for.
Having accurate inventory figures reported on the books enables additional inventory measures, such as inventory turnover.
Inventory turnover shows how many times inventory is sold and replaced over a given period. It’s important because you don’t want your cash sitting in inventory — and having too much inventory on hand leads to excess waste, inflating your cost of goods sold.
For example, fine dining restaurants need to weigh the benefit of having an extensive wine list with the cost of carrying too much inventory.
The ideal inventory turnover varies between full-service and quick-service concepts, so operators need to find their ideal ratio to help cut down on waste, maximize profitability, and encourage healthy cash flow.
3. Third-party delivery sales (net, not gross)
Deposits from third-party delivery providers, such as UberEats or Doordash, include sales minus commissions, marketing, delivery, credit card fees, sales tax, etc. We see three common mistakes with how these deposits are recorded.
1. First, the deposits are recorded on a cash basis. See the accrual basis vs cash basis mistake outlined above.
2. Second, deposits are not separated between sales, expenses, and liabilities and reconciled with sales from the POS. The sales reported on the payout report for each third-party delivery deposit should tie to the total payment tenders for that third-party delivery provider in the POS for that same date range.
For example, the total of UberEats payment tenders in the Toast Weekly Sales Summary report should tie to the gross sales total reported on the UberEats payout report for that same week. The variance should be closed out to the P&L so stakeholders can understand the total third-party delivery variances for the month. This could help identify setup issues, recurring error charges, or inappropriate refunds with third-party delivery systems. Many bookkeepers skip this reconciliation because it is time-consuming.
3. Fees paid to third-party delivery providers need to be separated and reported on the P&L in the date range they were incurred to correctly reflect the delivery expense for that period. Sales tax also needs to be correctly bifurcated to ensure there is no overpayment or underpayment of marketplace facilitator taxes. Here is a detailed step-by-step guide on how to streamline the accounting for this process.
4. Inappropriate chart of accounts
If a restaurant’s accounting system does not follow the recommended restaurant chart of accounts, it will not be able to compare its performance to industry standards.
COGS and sales categories need to be consistent and bifurcated so they can be compared to each other. For example, calculating food cost as a percentage of food sales and wine cost as a percentage of wine sales should be quickly calculable.
Labor should also be bifurcated into the appropriate functional categories so labor cost as a percentage of sales can be easily compared to industry standards. For example, separating management salaries and wages from back-of-house labor allows operators to manage wages relative to sales and industry standards.
5. Monthly data collection instead of weekly
Bills, checks, and POS transactions need to be recorded in real-time and reconciled weekly.
Since many bookkeepers don’t provide frequent reporting, many operators are forced to track income and expenses outside of their books and wait for their bookkeeper or accountant to prepare a P&L and balance sheet at the end of the month — each party hoping the other’s records match.
This is problematic because it doesn’t provide timely insight into the restaurant’s cash balance, vendor balance, and profitability. Real-time data is needed to identify problems as they happen and to make adjustments in purchasing or employee schedules before it’s too late.
Reliance on only monthly data collection can also result in an inaccurate understanding of cash balance. If operators don’t have a true cash balance that reflects uncleared bill payments and payroll checks, then they will not know the health of the restaurant and when/if they can issue payments.
Daily or real-time posting of transactions might seem impractical or expensive to accomplish. This might have been the case 10 years ago but not anymore. xtraCHEF by Toast can push data from Toast POS directly to the accounting system, automatically digitizing, GL coding, and exporting vendor invoices to the accounting system. The bookkeeper or accountant just needs to set it all up and review and reconcile the data with the bank and credit card accounts.
How can you avoid these mistakes?
Restaurants process a high volume of transactions and experience thin profit margins. This means operators need a cost-effective way of producing accurate and reliable books.
Combining Toast and xtraCHEF with a competent, modern, and savvy bookkeeper can help you achieve this. Use these five most common bookkeeping and accounting mistakes to help you identify whether you have access to reliable books and KPIs for your restaurant. If you don’t, it’s time to make a change.
Raffi Yousefian is a CPA and the CEO of RY CPAs. RY CPAs provides restaurant owners with frictionless, streamlined, and modern restaurant bookkeeping and tax services. They believe that with the appropriate technology and accountant, restaurants of all sizes can access the same financial data as national restaurant chains.