Restaurant accounting should help you to make better decisions as you run your restaurant business. But, in order for that to be reality, it’s important to have a fundamental understanding of core financial terms.
With that in mind, here are 15 restaurant accounting terms that you should know as you operate your business.
1. Generally Accepted Accounting Principles (GAAP)
In the United States, restaurant accounting is required to adhere to GAAP, which, as defined at Investopedia, represents “a common set of accounting principles, standards, and procedures issued by the Financial Accounting Standards Board (FASB).”
GAAP exists to provide consistency and comparability in financial information. These standards are occasionally updated as things change; in May 2014, for example, new revenue recognition guidance was put into place that replaced pre-existing standards, with full changes taking effect at the end of 2019 for non-public entities.
2. Balance Sheet
The balance sheet is one of the three basic financial statements that you’ll certainly want to receive from your restaurant accounting solution. It displays your business’s total assets, liability, and equity at a point in time.
It’s based on the foundational accounting equation: Assets = Liabilities + Equity.
Hopefully you know what revenue is – it’s the amount of sales brought in (as opposed to profit, which is revenue minus expenses). It’s basic. If this definition comes as a surprise, you will probably have business problems that this page can’t solve. That said, it’s also critical, and if your accounting is in disarray, it can be surprisingly hard to measure accurately over certain periods of time.
4. Income Statement
Income statement is another of the three core financial statements. It shows profit and loss over a period of time, taking into account all revenues and subtracting all expenses from both operating and non-operating procedures.
5. Chart of Accounts (COA)
A chart of accounts is an organized index of every financial account in the general ledger of a company over a specified period of time. Basically, it’s a comprehensive list of income and expenses broken into subcategories – say, by menu item or by location. It’s a helpful tool in communicating high-level financial information.
6. Occupancy Expenses
Occupancy expenses (or occupancy costs) are a major factor in restaurant accounting, especially for multi-unit businesses. They refer to the expenses associated with occupying physical premises – factors like rent expense, janitorial expense, insurance on buildings, repair and maintenance fees, utility costs, and property taxes.
7. Operating Expenses
Operating expenses (or operating costs) are those that are incurred in the day-to-day running of a restaurant business. This typically includes occupancy expenses. In fact, the three biggest operating expenses for restaurant businesses tend to be labor, food, and rent.
This is another basic term, but it’s an important one to clarify as you lay a foundation of accounting knowledge. In restaurant accounting terms, assets are resources owned by a company that have future economic value that can be expressed in dollars. For example: buildings, kitchen equipment, accounts receivable, or cash are all considered assets.
Assets are also one side of perhaps the most well-known accounting equation:
Assets = Liabilities + Equity.
Liabilities – or payables, as they’re also called – are financial obligations. Many restaurant businesses are funded with debt, for example, which is recorded as a liability on the balance sheet. Unless your business operates solely with cash, you’ll have liabilities to manage.
10. Cash Flow
Cash flow denotes the money moving in and out of a business, and it’s most meaningful when considered over a specified time period. The Statement of Cash Flows (or the Cash Flow Statement), which documents the cash generated and spent over a time interval, is the report associated with this measure – it’s the final of the three core accounting reports.
11. Cost of Goods Sold (COGS)
This term is commonly referenced phonetically by its acronym, COGS (which, of course, stands for cost of goods sold). It essentially refers to how much products cost to make. From Investopedia: “This amount includes the cost of the materials and labor directly used to create the good. It excludes indirect expenses, such as distribution costs and [equipment] costs.”
In accounting for restaurants, COGS refers only to the ingredients that make up the items on the menu.
12. Prime Cost
Prime Cost refers to COGS plus labor costs. For restaurant businesses, this is a crucial accounting metric because it’s a direct representation of the most impactful cost factors (labor and food).
Prime Cost also allows restaurants to calculate their prime cost ratio or percentage, which is a metric that compares costs against sales to determine how much is eaten up. The formula for this is Prime Cost / Total Sales = Prime Cost Ratio. Generally, a best practice is to hit around 55%.
13. Gross Profit after Prime Costs (GPPC)
Prime Cost will also help you to understand your restaurant business’s GPPC – your gross profit after prime costs. This is a straightforward term that denotes what your business is left with after you subtract Prime Cost (food and labor costs) from sales.
14. Earnings Before Income Tax, Depreciation, and Amortization (EBITDA)
EBITDA is a helpful measure of overall restaurant business performance that’s sometimes used as an alternative to net income or simple earnings.
The measure is fairly self-explanatory; it’s simply the amount of earnings before income tax, depreciation, and amortization. Its purpose is to offer a picture of performance that isn’t obscured by those expenses.
15. Total Sales Per Head
Total sales per head (or revenue per employee) is a helpful metric for showing how efficiently your restaurant business is using employees. Again, the calculation is revealed in the name of the term: to find total sales per head, take total sales over a given period and divide it by the total number of employees.
Because labor represents such a large cost in restaurant operations, tracking efficiency in this way can inform your decision-making.
Ready to get back to business?
Hopefully, these restaurant accounting terms have been helpful as you wrap your head around your company’s finances. A general understanding of accounting terms is important. But the reality is that their primary purpose shouldn’t be to puff you up with knowledge; their purpose is to give you insight to what matters most: running your business.
Good restaurant accounting can give you accurate data to make better decisions and build your business.
At Global Shared Services, we provide restaurants with outsourced accounting and financial services that are priced below the market and perform above it. If you’re ready to get restaurant accounting you can trust – and that will empower your decision-making – get in touch with us.
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With GSS, we meet our franchisor requirements on time and with accuracy. The local CPA could not handle our volume. We are so happy to have made the change. GSS knows our business and our franchisor requirements.Multi-unit fast sandwich Owner