Restaurant Accounting 101—An Expert Guide

Your Restaurant Has an 80% Chance of Failing! 

That’s right. 

According to recent research, 80% of restaurants fail within five years. 

The reason? Poor financial management tops the list every single time. 

Here’s the truth: you can serve the best food in town, have incredible customer service, and create an amazing atmosphere. But if you don’t understand your numbers, you’re setting yourself up for failure. 

Restaurant accounting isn’t just about tracking sales and expenses. It’s about knowing exactly where every dollar goes, understanding your true profitability, and making data-driven decisions that keep you ahead of the competition. 

Most restaurant owners treat accounting as a necessary evil. They hand over receipts to their bookkeeper once a month and hope for the best. This approach doesn’t work. 

You need to understand your food costs, labor percentages, cash flow patterns, and profit margins. You need to know which menu items make money and which ones are secretly draining your profits. 

This guide covers everything you need to know about restaurant accounting. 

What is Restaurant Accounting? 

Restaurant accounting is the process of recording, measuring, and analyzing all financial transactions in your restaurant business. 

But it’s not just about tracking money coming in and going out. 

Restaurant accounting gives you a complete picture of your financial health. It shows you exactly how much you’re spending on food, labor, rent, utilities, and everything else. More importantly, it reveals whether you’re making money or just breaking even. 

Here’s what restaurant accounting covers: 

• Revenue tracking – Every sale, whether it’s dine-in, takeout, delivery, or catering. 
• Expense management – Food costs, labor costs, rent, utilities, equipment, marketing, and all operational expenses. 
• Inventory valuation – The value of food, beverages, and supplies you have on hand. 
• Tax compliance – Proper recording of sales tax, payroll taxes, and income for tax reporting. 
• Financial reporting – Creating statements that show your profitability, cash flow, and overall financial position. 

The key difference with restaurant accounting is the complexity.

Unlike other businesses, you must deal with multiple revenue streams (dine-in, delivery, catering), which involves: 

• Perishable inventory that changes daily 
• Tips and gratuities 
• High employee turnover 
• Seasonal fluctuations 
• Complex cost structures 

Restaurant accounting also happens much faster than in other industries. You need real-time data to make decisions about menu pricing, staffing levels, and inventory purchases. 

Without proper accounting, you’re guessing. With it, you have the data you need to run a profitable restaurant. 

Restaurant Accounting vs Restaurant Bookkeeping: Key Differences 

Many restaurant owners use “accounting” and “bookkeeping” interchangeably. 

They’re not the same thing. 

Bookkeeping is the foundation – it’s the day-to-day recording of transactions. Accounting takes that data and turns it into actionable insights for your business. 

Here’s how they differ: 

Both are essential for your restaurant’s success. 

You need accurate bookkeeping to have reliable data. You need accounting to understand what that data means and how to use it to grow your business. 

Many small restaurants start with just bookkeeping and add accounting services as they grow.  

Larger restaurants typically need both from day one. 

Benefits of Restaurant Accounting 

Proper restaurant accounting isn’t just about keeping the IRS happy. 

It’s your competitive advantage. 

When you understand your numbers, you make better decisions. Better decisions lead to higher profits and lower stress. 

Here are the three biggest benefits: 

1. Make Informed Financial Decisions 

Without accounting, you’re making decisions based on gut feeling. 

With it, you’re making decisions based on data. 

Accounting shows you which menu items are profitable. That pasta dish might seem popular, but if your food cost is 45%, it’s killing your margins. 

You’ll know exactly how much you can spend on labor without hurting profitability. Most restaurants target 25-35% labor costs, but accounting shows you your specific sweet spot. 

Accounting also reveals your busiest and slowest periods. You can adjust staffing, plan promotions, and manage inventory accordingly. 

Want to expand to a second location? Your accounting data shows whether you can afford it and what kind of return to expect. 

Every major business decision becomes easier when you have solid financial data backing it up. 

2. Improve Budgeting

Most restaurants operate without a real budget. They spend money when they have it and panic when they don’t. 

Restaurant accounting gives you the data to create accurate budgets based on historical performance and realistic projections. 

You’ll know your seasonal patterns. If December is always slow, you can plan for lower revenue and adjust expenses accordingly. 

Accounting helps you identify unnecessary expenses. Maybe you’re spending $500/month on a software you barely use. Or your food waste is 15% when it should be under 5%. 

You can also set realistic revenue targets. Instead of hoping for $50,000 in sales next month, you’ll know what’s achievable based on your trends. 

Better budgeting means better cash flow management. You’ll never be surprised by a large expense or caught without enough money to cover payroll.

3. Remain Compliant

Restaurant tax compliance is complicated. 

You deal with sales tax, payroll taxes, tip reporting, and income taxes. Each has different rules and deadlines. 

Proper accounting ensures you’re collecting and remitting the right amount of sales tax. In most states, you’re personally liable if you mess this up. 

Payroll compliance is even more complex. You need to track regular wages, overtime, tips, and various deductions. Your accounting system should handle this automatically. 

“Tip: reporting is required by the IRS. You need detailed records of cash tips, credit card tips, and tip pools. Accounting software can track this automatically.”

During tax season, good accounting saves you thousands in preparation fees. Your CPA won’t need to spend hours organizing your records – everything is already clean and categorized. 

If you ever get audited, proper accounting records are your best defense. The IRS wants to see detailed, organized financial records. Accounting gives you exactly that. 

Important Factors to Consider When Doing Accounting for a Restaurant 

Restaurant accounting has unique challenges you won’t find in other businesses. 

Get these wrong, and your financial reports will be useless. Get them right, and you’ll have accurate data to run your business. 

Here are the six critical factors every restaurant owner needs to understand: 

1. Tip Handling 

Tips complicate everything in restaurant accounting. 

You’re dealing with cash tips, credit card tips, tip pools, and different tax implications for each. 

The IRS requires you to report all tips as income. This includes tips your employees receive directly from customers, not just what goes through your POS system. 

You need systems to track: 

• Cash tips reported by employees 
• Credit card tips processed through your system 
• Tip pools and how they’re distributed 
• Tip credits against minimum wage 

Many restaurants use tip reporting software that integrates with their POS system. This automatically calculates tip income and ensures compliance with federal reporting requirements. 

Remember, you’re responsible for payroll taxes on all reported tips, even cash tips you never touched. 

2. Inventory Management 

Restaurant inventory is different from retail inventory. 

Your products expire. Your costs change daily. Your usage fluctuates based on sales mix and waste. 

Traditional accounting methods don’t work well for restaurants. You need systems that account for: 

• First in, First out (FIFO– Older inventory gets used before newer inventory to minimize spoilage. 
• Weighted average costing – Since you buy the same ingredients at different prices throughout the month. 
• Daily inventory tracking – Weekly or monthly counts aren’t frequent enough for perishable goods. 
• Recipe costing – Breaking down each menu item to its ingredient cost. 

Most successful restaurants do daily inventory counts for high-value items like proteins and alcohol. Lower-value items like condiments can be counted weekly. 

Your accounting system should integrate with your inventory management to automatically update food costs as you receive deliveries and record sales.

3. Profit & Loss or Cash Flow Statements

Standard P&L statements don’t tell the whole story in restaurants. 

You need both profit & loss and cash flow statements, but they need to be restaurant specific. 

Your P&L should break out: 

• Food costs by category (proteins, produce, dairy, etc.) 
• Labor costs by position (kitchen, front of house, management) 
• Operating expenses by type (utilities, rent, marketing, etc.) 

Cash flow is even more critical in restaurants because of daily sales fluctuations. You might be profitable on paper but run out of cash between busy periods. 

Track cash flow weekly, not monthly. Restaurants have daily cash needs that monthly statements can’t capture.

4. Accounting Periods for Restaurants

Most businesses use calendar months for accounting periods. 

Restaurants shouldn’t. 

Calendar months create inconsistent reporting periods. Some months have four weekends, others have five. Since weekends are typically your busiest times, this skews your month-to-month comparisons. 

Instead, use 4-week accounting periods (13 periods per year). This gives you consistent comparisons and better trend analysis. 

Some restaurants use 4-4-5 week quarters (two 4-week periods followed by one 5-week period). This aligns better with seasonal planning while maintaining consistency. 

Your POS system and accounting software should support whatever period structure you choose.

5. Prepaid Accounts

Restaurants deal with many prepaid expenses that need special handling. 

Insurance, rent, equipment leases, and service contracts are often paid quarterly or annually. These need to be allocated properly across accounting periods. 

You also deal with customer prepayments like gift cards, deposits for private events, and loyalty program credits. 

These create liabilities on your balance sheet until the service is provided, or the product is delivered. 

Your accounting system needs to track: 

• When prepayments were made 
• How much has been used/earned each period 
• Remaining balances and expiration dates 

Gift card breakage (cards that are never redeemed) can be recognized as revenue after a certain period, but state laws vary on this.

6. Vendor Credits/Short Pays

Restaurant vendors frequently provide credit for damaged goods, late deliveries, or pricing errors. 

These credits rarely arrive in the same accounting period as the original purchase. 

You need systems to track: 

• Outstanding credits from vendors 
• When credits are applied to future invoices 
• Partial payments when you dispute charges 

Many restaurants use “short pays” when they receive damaged goods or poor service. You pay the undisputed portion of an invoice and document the disputed amount. 

Your accounting system needs to track these disputed amounts and match them when credits or adjustments are received. 

Without proper tracking, you’ll either double-count expenses or miss legitimate credits that improve your food costs. 

In-House vs Outsourced Restaurant Accounting 

One of the biggest decisions you’ll make is whether to handle accounting in-house or outsource it to professionals. 

There’s no universal right answer. 

It depends on your restaurant’s size, complexity, budget, and how much control you want over the process. 

Here’s how the two options compare: 

Which Accounting Method is Right for Your Restaurant? 

You have two main accounting methods to choose from: cash accounting and accrual accounting. 

The method you choose affects when you record income and expenses, which impacts your tax liability and financial reporting. 

Most small restaurants start with cash accounting, but many are required to switch to accrual as they grow. 

Here’s what you need to know about each method: 

Cash Accounting 

With cash accounting, you record transactions when money changes hands. 

You record sales when you receive payment, not when you serve the meal. You record expenses when you pay bills, not when you receive goods or services. 

Pros: 

• Simple to understand and implement 
• Shows actual cash position 
• Lower tax liability in growth periods 
• Less complex bookkeeping requirements 

Cons: 

• Doesn’t show true profitability 
• Poor matching of revenues and expenses 
• Can’t track accounts receivable/payable 
• Limited financial analysis capabilities 

Accrual Accounting 

With accrual accounting, you record transactions when they occur, regardless of when payment happens. 

You record sales when you serve customers, even if they pay with a credit card that won’t settle until tomorrow. You record expenses when you receive inventory, even if you don’t pay the invoice for 30 days. 

Pros: 

• Shows true profitability 
• Better matching of revenues and expenses 
• Tracks all assets and liabilities 
• Required for financial reporting and loans 
• More accurate financial analysis 

Cons: 

• More complex to implement 
• Higher accounting costs 
• May show profit when cash is tight 
• Required quarterly tax estimates 

Which Method Should You Choose? 

The IRS makes this decision for many restaurants. 

If your restaurant has gross receipts over $29 million averaged over the past three years, you must use accrual accounting. 

If you’re below that threshold, you can choose either method.

Restaurant Accounting KPIs to Measure

Key Performance Indicators (KPIs) turn your financial data into actionable insights. 

Without KPIs, you’re just collecting numbers. With them, you know exactly where your restaurant stands and what needs to be improved. 

Sales 

Sales is your most basic but most important KPI. 

You need to track more than just total sales. Break it down to understand what’s driving your revenue. 

Key sales metrics: 

• Total Sales – Your gross revenue before any deductions. 
• Average Ticket Size – Total sales divided by number of transactions. Shows whether customers are ordering more or less per visit. 
• Sales Per Square Foot – Annual sales divided by dining room square footage. The industry average is $150-300 per square foot. 

Sales by Day Part: 

• Breakfast: What percentage of daily sales 
• Lunch: Typically, 30-40% of daily sales 
• Dinner: Usually 50-60% of daily sales 

Track daily sales trends to identify busy and slow periods. Use this data for staffing, inventory planning, and promotional timing. 

Labor Cost 

Labor cost is typically your second-largest expense after food costs. 

Most restaurants should target 25-35% of sales, but it varies by restaurant type. 

Key labor metrics: 

• Total Labor Cost % = (All wages + payroll taxes + benefits) ÷ Total Sales 
• Kitchen Labor % – Should be 12-18% of sales for most restaurants. 
• Front of House Labor % – Should be 8-15% of sales. 
• Management Labor % – Should be 8-12% of sales. 
• Labor Cost Per Hour = Total labor cost ÷ total hours worked. Shows efficiency of your workforce. 
• Sales Per Labor Hour = Total sales ÷ total labor hours. Industry benchmark is $30-50 per hour. 

Restaurant sales fluctuate dramatically, so your labor costs need to flex accordingly. 

COGS & COGS Ratio 

The cost of goods sold (COGS) is what you pay for the food and beverages you sell. 

Your COGS ratio shows how efficiently you’re managing food costs. 

COGS Calculation: 

• Beginning Inventory + Purchases – Ending Inventory = COGS 

COGS Ratio: 

• COGS ÷ Total Sales = COGS % 

Monthly COGS analysis: 

Compare actual vs theoretical food cost. Theoretical is what you should spend based on your recipes and sales mix. The difference shows waste, theft, or portion control issues. 

Prime Cost 

Prime cost combines your two largest expenses: food costs and labor costs. 

It’s the most important restaurant KPI, because it shows your operational efficiency. 

Prime Cost Formula: 

• Food Costs + Labor Costs = Prime Cost 
• Prime Cost ÷ Total Sales = Prime Cost % 

Industry targets: 

• 55-60%: Excellent 
• 60-65%: Good 
• 65-70%: Acceptable but needs improvement 
• Above 70%: Critical – immediate action needed 

Why prime cost matters: 

If your prime cost is 65%, you have 35% left to cover rent, utilities, insurance, marketing, debt service, and profit. If it’s 75%, you only have 25% left. 

EBITDA 

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. 

It shows your restaurant’s operating performance without the effects of financing and accounting decisions. 

EBITDA Calculation: 

• Net Income + Interest + Taxes + Depreciation + Amortization = EBITDA 

EBITDA Margin: 

• EBITDA ÷ Total Sales = EBITDA % 

Industry benchmarks: 

• 15-20%: Excellent 
• 10-15%: Good 
• 5-10%: Acceptable 
• Below 5%: Poor 

Why EBITDA matters: 

It’s how investors and lenders evaluate restaurant performance. It shows your ability to generate cash from operations. 

EBITDA is also useful for comparing restaurants with different capital structures. A restaurant with high debt payments might have low net income but strong EBITDA. 

Revenue by Head 

Revenue per head (also called revenue per customer or per cover) shows how much each customer spends on average. 

It’s crucial for understanding your pricing strategy and customer behavior. 

Calculation: 

• Total Revenue ÷ Number of Customers = Revenue per Head

Track by segments: 

• Lunch vs dinner 
• Weekday vs weekend 
• Dine-in vs takeout vs delivery 
• New customers vs repeat customers 

Net Profit Margin 

Net profit margin is your bottom line – what’s left after all expenses are paid. 

It shows the ultimate financial health of your restaurant. 

Net Profit Margin Formula: 

• Net Income ÷ Total Sales = Net Profit Margin % 

Industry benchmarks: 

• 3-5%: Good for most restaurants 
• 5-8%: Excellent 
• Above 8%: Outstanding 
• Below 3%: Needs improvement 

Factors affecting net profit: 

• Prime cost (biggest impact) 
• Rent and occupancy costs 
• Marketing expenses 
• Equipment costs and depreciation 
• Interest and debt service 

Track net profit monthly and compare to the same month last year to account for seasonality. 

Ready to master all 12 critical restaurant KPIs? Download our free whitepaper and get the complete formulas, benchmarks, and strategies to transform your restaurant’s performance today.

How to Find the Right Restaurant Accountant? 

The wrong accountant can cost you thousands in missed deductions, compliance issues, and poor financial advice. 

The right one becomes your most valuable business partner. 

Here’s how to find an accountant who understands restaurants and can help you grow: 

Look for Restaurant Experience 

Don’t hire a general accountant who does taxes for dentists and real estate agents. 

Restaurant accounting has unique challenges that require specialized knowledge: 

• Multi-location consolidation 
• Tip reporting and compliance 
• Inventory valuation for perishables 
• POS system integration 
• Multi-revenue stream tracking 

Ask potential accountants: “What percentage of your clients are restaurants?” If it’s less than 30%, keep looking. 

Verify Credentials 

Look for these qualifications: 

• Certified public accountant (CPA – Required for tax preparation and financial statement preparation. Ensures they have proper education and continuing education requirements. 
• Restaurant industry certifications – Some CPAs have specialized restaurant certifications or are members of restaurant industry associations. 
• Technology proficiency – They should be familiar with restaurant POS systems, inventory management software, and modern accounting platforms. 

Questions to Ask Before Hiring: 

Experience Questions: 

• How many restaurant clients do you currently serve? 
• What types of restaurants do you work with? (fast casual, fine dining, etc.) 
• Can you provide references from current restaurant clients? 
• Have you helped restaurants through audits or compliance issues? 

Service Questions: 

• What services are included in your base fee? 
• How quickly do you typically close monthly books? 
• What reports do you provide and how often? 
• Do you offer budgeting and forecasting services? 
• How do you handle tax planning throughout the year? 

Communication Questions: 

• Who will be our primary contact? 
• How quickly do you respond to questions? 
• Do you provide proactive advice or just reactive services? 
• How often will we meet to review financials? 

The right restaurant accountant becomes a trusted advisor who helps you make better financial decisions, stays compliant with regulations, and grows your business profitably. 

Choose Analytix Solutions for Accurate Accounting for Your Restaurant 

You’ve learned what great restaurant accounting looks like. 

Now you need someone who can deliver it. 

Analytix Solutions specializes exclusively in restaurant accounting. We understand the unique challenges you face because we work with restaurants every day. 

Why Restaurant Owners Choose Analytix Solutions: 

• Restaurant-Specific Expertise – We have extensive experience in service restaurants, which means we understand your industry inside and out. Our team knows how to handle tip reporting, inventory management, multi-location consolidation, and all the other complexities that make restaurant accounting different. 

• Advanced Technology Integration – We integrate seamlessly with your existing POS system, inventory management software, and payroll platforms. No more manual data entry or reconciling multiple systems. Everything flows automatically into your accounting records. 

• Real-Time Financial Reporting – Get weekly financial reports that show your prime cost, labor percentages, food costs, and key performance indicators. You’ll know exactly where your restaurant stands financially, not three weeks after the fact. 

• Proactive Tax Planning – We don’t just prepare your taxes – we plan throughout the year to minimize your tax liability. Our restaurant tax experts identify deductions and strategies that general accountants may miss. 

Ready to Take Control of Your Restaurant’s Finances? 

Stop guessing about your restaurant’s profitability. 

Get the accurate, timely financial information you need to make smart business decisions and grow your restaurant. 

Schedule a free 30-minute consultation with our restaurant accounting experts. 

[Schedule Your Free Consultation Today] 

FAQs 

1) What accounting software is best for restaurants? 

QuickBooks Online Plus ($90/month) works well for single locations. Restaurant365 ($269/month) is built specifically for restaurants with POS integration. QuickBooks Desktop Enterprise ($1,340+/year) is best for multi-location operations. Choose software that integrates with your POS system to avoid manual data entry. 

2) How much should a restaurant spend on accounting services? 

Single-location restaurants typically spend $500-1,500/month. Multiple locations cost $1,000-3,000/month. Large restaurant groups pay $3,000+/month. Price depends on your transaction volume, number of locations, and service level needed. Basic monthly statements and tax prep are usually included. 

3) How often should restaurants do their accounting? 

Weekly, not monthly. Restaurant sales and costs fluctuate daily, so you need frequent financial updates. Close your books weekly and review key metrics like food costs, labor percentages, and cash flow. Many restaurants use 4-week accounting periods instead of calendar months for more consistent reporting. 

4) What are the most important tax deductions for restaurants? 

Food and beverage costs, labor expenses (wages, payroll taxes, benefits), equipment purchases, lease improvements, marketing costs, professional services, insurance, utilities, maintenance and repairs, and vehicle expenses. Less obvious deductions include uniforms, staff training, licenses, merchant processing fees, and business meals (50% deductible). Work with a restaurant-specialized CPA to maximize deductions and stay compliant. 

Darshak Mehta Accounting Manager

Darshak Mehta is a seasoned financial expert specializing in providing transformative business services to the hospitality industry. He has carved a niche in helping small to mid-sized businesses streamline their operations, enhance profitability, and sustain growth through strategic financial management. Under his leadership, Analytix has grown to support over a thousand franchise and restaurant businesses with tailored financial solutions that address the unique challenges of the hospitality industry.