Businesses in the restaurant industry generate most of their revenue from selling food and beverages. Since these products are usually perishable, restaurant accounting is quite different from other industries. A small restaurant business will often change its inventory level based on the demands of the customers. The business also needs to consider various factors like labor costs and the cost of goods sold (COGS) in their operations. Due to such differences from businesses in other industries, the accounting methods used by restaurants are also different. Let’s have a look at the major accounting methods used by small restaurants:
Cash Accounting Method
The cash accounting method is based on cash transactions. This method is usually used by small restaurants and bars that have fewer transactions. The method allows the business to record the generated income at the point when cash is received from sales and cash is paid for expenses. This means that the transactions and activities of the restaurant are recorded whenever cash is exchanged. The method is ideal for small restaurants because they receive cash payment immediately when a customer is served food, beverages, or other services.
The cash accounting method is considered effective for small restaurants because it fits into the restaurant business model. The customers pay for the food, beverages, and services right away as they are rendered. This means that they do not owe the restaurant any money later after the service. This is quite different from what happens in other industries like construction, where the payment is made later. It also means that restaurants usually do not have any accounts receivable balance. This makes it easy to record the payments and revenues as they occur. When thinking about the cash accounting method for restaurants, the following holds true:
- The cash accounting method is simple and straightforward. All your restaurant transactions are recorded the moment money goes in or out of your restaurant account.
- The cash accounting method does not work well with larger restaurant businesses. If you run a big restaurant or your restaurant business operates on large inventory levels, this method will obscure the true financial position of the business.
- The alternative approach to using cash accounting is the accrual accounting method. This approach is different in the sense that transactions are recorded as they occur. Instead, transactions are recorded at the moment when an order is made without considering whether cash has been paid or not.
Is Cash Accounting Method the Most Ideal for Small Restaurants?
The cash accounting method is by far the easiest and simplest approach to restaurant accounting. However, it is not the most accurate for determining activity nor the most ideal for restaurant businesses. At first, the method seems like the best approach for businesses in the restaurant industry because of recording income as it enters the business and expenses as they leave. But this method makes the restaurant appear more profitable than it actually is by recording income ahead of the expenses.
The major drawback of this method is that it does not recognize delayed payments from credit accounts and payment plans. For example, the restaurant accountant will only record a transaction only after payments have been made for the deliveries leaving out any pending payments. However, most restaurants operate on accrued payments where vendors allow them to pay weeks or months after deliveries. This makes the accounting inaccurate because it does not account for such transactions, which may be large and periodic.
Example of Restaurant Cash Accounting
If your restaurant receives $150 from the sale of your top seller menu item on January 10,