Managing your finances can be one of the most difficult parts of running a restaurant. Restaurant bookkeeping comes with special challenges—expenses can fluctuate wildly, and your profit margin is often very thin. But by monitoring your finances, you can ensure that your restaurant remains profitable. To assist you, we have collected 12 key restaurant bookkeeping tips:
- Reconcile accounts regularly.
- Understand bookkeeping for restaurant tips.
- Claim your tax credit on employee tips.
- Collect and remit sales tax.
- Use the right accounting and POS systems.
- Hire an outside bookkeeper.
- Correct errors the moment they arise.
- Review financial reports.
- Audit your POS buttons.
- Consider outsourcing payroll.
- Streamline A/P.
- Track your prime costs.
1. Reconcile Accounts Regularly
It’s critical to maintain up-to-date accounting records to track your restaurant’s revenue, labor, food, and operating expenses and to keep things organized when you have to pay sales tax or liquor excise tax. Reconciling your accounts is the only way to know that you have accounted for all transactions, and it makes you aware of incorrect deposits, lost checks, and cash variances. You should reconcile all bank and credit card accounts, loans, lines of credit, and payroll liabilities.
Bookkeeping tasks for restaurants typically include:
- Daily sales and cash deposits tracking
- Expense monitoring
- Payroll and tips management
- Vendor payments
- Monthly bank and credit card reconciliations
- Financial statements generations
Don’t forget to save receipts for any business expenses that you plan to claim on your tax return. Make it a practice to write any notes on the paper receipt about the expense, including what it’s for. You can either save this receipt in a paper file or upload it to your accounting software with your mobile app by taking a photo.
2. Understand Bookkeeping for Restaurant Tips
Required Tips & Restaurant Income
Due to complex IRS guidelines on tips recordkeeping, accounting for restaurant tips can be somewhat confusing. Essentially, any automatic gratuity or service charge (applied for big parties, for example) is considered restaurant revenue because the customer didn’t determine the amount—it was required.
When the staff receives these payments, they are considered wages and are subject to withholding and reporting as wages. They should be shown on the employer’s form Form 941 and the employee’s W-2 as wages—not tips.
Discretionary Tips are Employee Income
Discretionary tips from customers, whether in cash or added to credit cards, are considered income of the employee and should not be shown on the restaurant’s books. However, the restaurant is required to track these amounts and withhold FICA and income tax for these amounts. You’ll also need to pay the employer’s share of FICA on discretionary tips. While not required, it’s good practice to have your employees report their daily tips to you on Form 4070A.
It’s a bit confusing to withhold tax on tips that went directly to the employee. Since you never have access to the tips, you withhold the required amount from the employee’s fixed wage. If the fixed wage is insufficient to withhold all the required tax, you withhold tax in the following order:
- All taxes on non-tip wages
- FICA tax on tips
- Income tax on tips
Allocated Tips
Restaurants that typically have more than 10 employees work at least 80 hours per day must file Form 8027 to report employees’ tips. If the total tip income reported is less than 8% of restaurant revenue, you might be required to allocate additional tips to your employees. If allocated tips are made, then you’ll need to withhold and pay taxes on them the same as cash tips.
3. Claim Your Tax Credit on Employee Tips
As an incentive for restaurants to report employee tips collected on the employee’s W-2, restaurants can claim a tax credit on their tax return equal to 7.65% of tips reported by employees. Essentially, this is a refund of the employer’s portion of payroll taxes on reported tips. Only tips in excess of the minimum wage are eligible for the credit, which is claimed by filing Form 8846.
4. Collect and Remit Sales Tax
Sales tax is determined by state and local laws, but most restaurants in the US are required to collect sales tax from customers. The sales tax return is then filed with the state or local jurisdiction and the tax is remitted as a payment.
It’s vital that you keep a separate payables account for sales tax collected and exclude sales tax collected from the revenue of the restaurant. A good POS system should help make the separation of tips and revenue a breeze but usually won’t file the sales tax returns.
5. Use the Right Accounting Software & POS System
It’s extremely important that your accounting software integrates with your POS system. Features that are especially useful for restaurants include inventory management, payroll, and bill management. The best restaurant POS systems are all-in-one restaurant management solutions with employee management, staff scheduling, customer loyalty tools, reservations, and online ordering capabilities.
The best restaurant accounting software addresses the intricacies of restaurant operations and back office management, such as inventory taking, cost management, and employee scheduling. More advanced restaurant accounting software may also offer features like catering management and variance analysis.
6. Hire an Outside Bookkeeper
Rather than trying to handle the books yourself or hiring someone to work internally, we recommend getting an outside bookkeeper. This wouldn’t be a full-time position, and they’re a separate person from your business accountant. Thus, they have no control over or connection to the daily ordering and sales in your restaurant. They won’t be able to fudge numbers or conceal cash or products.
Depending on your sales volume and the tasks you need help with, your bookkeeper may only work on your records a couple of hours a day or week. Ideally, you’ll want a bookkeeper who is familiar with the restaurant industry. Ask for recommendations from other nearby restaurant owners. Typically, they’re happy to send their bookkeepers more work if they can accommodate it.
7. Correct Errors the Moment They Arise
With the hectic pace of a restaurant, it’s easy to get distracted and put off tasks that would be better handled immediately. In the heat of a busy service, it’s easy to think, “I’ll remember later.” But more often than not, you won’t.
For example, maybe your dishwasher forgot to clock in, your supplier delivered one less case of lemons than what was listed on your invoice, or a server entered an incorrect tip on a check. When these issues arise, it’s important to correct them the moment they happen.
You—or your manager or supervisor on duty—should correct time cards, note shortages on deliveries, and audit server receipts during every single shift. At the end of the pay period or the end of the month, you’ll avoid burning precious energy trying to remember if you ever got a credit for that missing produce or why you got a chargeback request from a customer.
8. Review Financial Reports
Reviewing your financial reports on a regular basis will provide valuable insight into your restaurant’s performance. The profit and loss (P&L) statement shows your profitability and the financial health of your business.
By analyzing different revenue sources, you can determine which areas of your business are the most profitable—whether that’s food sales, alcohol sales, merchandise purchases, or catering. You can then take that data and look for ways to grow the most profitable areas while you improve on those that are lacking.
Other useful reports include:
- Restaurant sales report: This shows the total sales that happened at your restaurant on a particular day. It should include the total number of bills generated and any discounts that were applied. Reviewing this report can help you decide whether you should revamp your menu or focus on marketing strategies that will bolster sales.
- Inventory report: This gives you the beginning and closing inventory of each item and the amount of each item used on any particular day. It also includes the variance report, which tells you the difference between the actual stock consumption and the ideal stock consumption. A variance of 3% to 5% is acceptable, but anything over this implies internal theft or food wastage.
- Expense report: This tracks items like the rent, utilities, payroll, inventory costs, equipment maintenance, and the budget required to host different events. It should give you a comprehensive understanding of all of the expenses that your restaurant incurs on a daily basis and over a period of time. This allows you to allocate your budget well and identify where you may need to cut down.
- Menu performance report: Analyzing this gives you insight into what your customers are enjoying about your restaurant. You can identify the items that are contributing the most to sales and those that are least popular. Based on this information, you can eliminate or add new items to the menu to boost sales.
- Staff performance report: It’s important to review this if you want to run a successful restaurant business. You can set individual goals and key performance indicators (KPIs) for each staff member and measure their productivity on a weekly or monthly basis. For example, you could set a goal for the kitchen staff to keep the food costs under a certain percentage. You could also measure the productivity of your wait staff by analyzing the number of tables served or total weekly sales.
9. Audit Your POS Buttons
A POS system does a lot of heavy lifting in a restaurant, but it’s prone to user error. When you enter menu items into your POS, check that they’re coded correctly to ensure accurate food and beverage costing, but even more so for tax tracking. Before you make any changes to the POS system, ensure they’ll have a positive effect on the front-of-house interaction with the POS and your ability to analyze data when it comes to the reports that are generated.
You’ll also want to triple-check that taxable items reflect the correct state and local sales tax so that you collect the correct amount from customers. It’s surprisingly easy to overlook the tax settings when you enter new menu items. So, take extra care to ensure you always have the correct amount on hand when your tax bill comes due.
Some restaurants struggle to pay sales tax, so it’s useful to have a separate account that can be used to deposit what’s collected. That way, it’s not as much of a shock when making lump-sum payments on a set schedule.
10. Consider Outsourcing Payroll
Outsourcing your payroll is an excellent way to help you save time. It gives you access to the necessary expertise that will ensure your financial data is accurate. Not only will your payroll service be able to generate paychecks via direct deposit, but it’ll also track employee payroll taxes and file them along with the associated forms on a quarterly basis.
There are many intricacies to restaurant payroll, which we cover in our article on restaurant payroll tips, reporting, and labor laws. We also evaluated the best restaurant payroll software and identified solutions that are easy to use and come with good client support. Many of them offer tools to manage payroll taxes, track tips, and monitor attendance.
Our related resources:
- How to Do Payroll for Small Businesses [+ Video & Template]
- In-house Payroll vs Outsourcing: Which Is Best for You?
- How to Choose a Payroll Service
11. Streamline A/P
Automating your restaurant’s bills allows you to monitor exactly when the next bill is due. By integrating A/P software, you’ll be able to link your business account with the application. You can add a vendor, input the payment date and amount, and enter the category for each transaction.
Your software will alert you when a payment is due, and in many cases, you’ll be prompted to authorize the payment and deposit the amount directly into the vendor’s account. After the transaction is completed, it’ll mark the bill as paid.
Depending on the needs of your restaurant and the number of bills that you process, there’s a variety of A/P software programs that may be able to assist you. The best ones must have strong general A/P features, such as purchase order (PO) tracking and vendor payment tracking. Good A/P automation should also reduce data entry and streamline the A/P process.
12. Track Your Prime Costs
Prime costs are items such as food and beverage costs, salaries, payroll taxes, and benefits. Since this type of cost—as opposed to fixed costs like rent, equipment leases, and insurance—makes up the majority of a restaurant’s expenses, it’s the best indicator of a restaurant’s profitability. It also shows how well the business is being managed on a daily basis.
A restaurant’s food costs can fluctuate based on many factors, including seasonality or natural disasters. By regularly monitoring food costs, you can decide whether you need to make changes to order quantities, raise menu prices, or change your overall menu to only include ingredients that have fewer price fluctuations.
How Restaurant Bookkeeping Is Unique
Restaurant owners have many factors to consider when it comes to restaurant bookkeeping. Ideally, your accounting software will integrate with your POS system, and you can track multiple locations, if needed, and update the cost of preparing recipes based on daily food prices.
Employee scheduling, sales forecasting, and electronic data exchange (EDI) with vendors are also key functionalities. Other components include payroll, automated A/P, and inventory management.
Frequently Asked Questions (FAQs)
Like most bookkeepers, a restaurant bookkeeper should record sales, track and pay bills, and reconcile cash accounts regularly. They might also run payroll, although it’s often more cost-effective to outsource payroll. A unique job duty of a restaurant bookkeeper is to track employee tips and ensure taxes are properly withheld from base pay to cover tips.
Most restaurants use the cash-method of accounting to report income and expenses on their tax return. Because the vast majority of the income is immediately collected from customers, there is little, if any, difference between cash and accrual revenue. However, the cash method gives restaurants some freedom to decide when expenses will be deducted since the deduction is determined by the payment date. For more information, see our comparison of the cash- vs accrual-basis accounting methods.
Like all businesses, a restaurant’s bookkeeping system is based around its chart of accounts, which is a list of asset, liability, income, expense, and owner’s equity categories available for accounting entries. The level of detail desired will determine how detailed your chart of accounts should be. However, modern accounting software can also provide detailed information through the use of classes, locations, and tags without requiring an overly detailed and confusing chart of accounts.
Bottom Line
With so many different moving parts, handling the bookkeeping for a restaurant can be complicated. Not only do you need to manage payroll and inventory, track your A/R and A/P, monitor financial reports, and select the right accounting software and POS system, but you also need to account for restaurant tips and audit your POS buttons. It’s a good idea to consider outsourcing your books to an outside bookkeeper who can help you stay compliant and on top of your finances.
