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“Accounting Success” for Your Restaurant

September 11, 2017 by Ed Becker

The first thing to do is set up a chart of accounts, and then you should  make sure that the three key accounts complement each other.

The very first step you need to take, is to set up your chart of accounts, as everything else hinges on this fundamental list. The trick here is that you must track everything that is most important for you to know as either a separate item, or as a subsidiary under one of the top items.

To a large extent, this depends on the size of your operation. For example, if you have one cook and two waiters, it may be unnecessary to have separate Cook and Waiter sections under Cost of Labor. It’s excessive, it’s not needed by the tax authorities, and it may not really tell you anything about how your business is operating.

The Three Key Accounts

Once the chart of accounts is set up, the next step is for you to decide how you want to set up your accounting system. After the chart of accounts itself, the three most important items for a restaurant’s accounting system are:

  1. Cost of Goods Sold Account
  2. Sales Account
  3. Inventory Account

The cost of goods sold account lists everything that you have sold, the sales account lists everything you sell, and the inventory account lists all the items that you have on hand, ready to be sold.  It’s important for these three accounts to match up to each other. Here’s what we mean:

Let’s start with the costs of goods sold account, which, in the case of a restaurant, is the total cost, to you, of everything intended for customer consumption.

There are a number of different ways to do this. You can just lump everything together. You can also track Food, Alcoholic Beverages, and Non-Alcoholic Beverages separately, and have all three report to a cost of goods sold account. Under Liquor, you can have the three sub accounts of Beer, Wine, and Hard Liquor. Alternatively, you could subdivide Food into categories such as Breakfast, Lunch or Dinner.

There are many ways to do this. For example, if you sell relatively little alcohol, it wouldn’t make too much sense to subdivide alcohol into three subdivisions. The point is that each restaurant has a different emphasis, and your accounting system should reflect it.

Gross Profit is Sales minus Cost Of Goods Sold

It’s important to understand the way these three most important accounts work together. You start your business on day one with no sales as of yet, but you have items in inventory, ready to be sold. These items, and most importantly how much you paid for each one, are all listed in your Inventory Account.

Later that day, you make your first sale of an item, and the name of that item, and what you sold it to your customer for, goes into the Sales Account. But, since you sold the item, it is no longer in your inventory; it is now a “good” that you sold. So, it comes out of your Inventory Account, and is now listed in your Cost of Goods Sold Account.

So, the Gross Profit on that sale is equal to the entry in the Sales Account minus the listing in the Cost of Goods Sold account.

What would happen if the Three Accounts Don’t Mirror Each Other?

What would happen if your Sales Account were divided into Breakfast, Lunch and Dinner and your Cost of Goods Sold account was divided into the categories of Meat, Vegetables and Bread. There would be no way to subtract the cost of Breakfast food from the amount of revenue garnered from breakfast, simply because the separate cost of foods for breakfast was never calculated.

The point is, you must decide whether it is more important to know the gross profit for breakfast, or whether it is more important to know the gross profit for meat. It’s certainly important to know how well you are doing in each subsection of your restaurant business. How does gross revenue for alcoholic beverages compare to gross revenue for food, as an example?  Having this knowledge will go a long way toward charting the future of your restaurant business.

QuickBooks to the rescue

Fortunately, with a modern, accounting system like QuickBooks, you can, for the most part, get around these matching restrictions by the adroit use of the Reports facility, which we will cover in blogs subsequent to this one.  You may also consider hiring a QuickBooks Pro Advisor to accomplish these tasks, as it might be an efficient way to get started.  When deciding, please do consider the time you will spend and your abilities, hiring a ProAdvisor can be a time-saver and a more efficient way to utilize your resources.

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