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How to Do Accounting for a Restaurant

How to Do Accounting for a Restaurant (Step-by-Step Guide)

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Running a small or fine dining restaurant in Florida comes with unique accounting challenges. Below is a step-by-step guide to help restaurant owners manage their finances effectively, with key steps summarized first. Following these steps will streamline your bookkeeping, ensure tax compliance, and boost profitability.

Quick Overview: Restaurant Accounting Steps

  • Separate Business Finances: Keep your restaurant’s bank accounts and credit cards separate from personal finances for clear records and legal protection.
  • Choose Accounting Software (e.g., Xero): Use a reliable cloud accounting system like Xero to track income, expenses, and taxes in real time.
  • Set Up a Restaurant Chart of Accounts: Create categories for assets, liabilities, equity, sales (food, beverage), Cost of Goods Sold (COGS), payroll, overhead, etc.
  • Track Daily Sales & Income: Record each day’s sales from your POS system and reconcile cash vs. card receipts for accuracy.
  • Control Expenses and Inventory: Record all expenses (food supplies, utilities, etc.) and use inventory management to calculate COGS and reduce waste.
  • Manage Payroll and Tips: Implement a payroll system, account for wages and tips, and adhere to tip reporting and tax withholding requirements.
  • Reconcile Accounts Regularly: Match your bank statements with your books (daily or weekly) to catch errors or fraud and ensure accuracy in cash control.
  • Review Financial Reports Monthly: Generate Profit & Loss, cash flow, and balance sheet reports. Analyze key metrics like prime cost (COGS + labor ≈ 55–60% of sales) to gauge profitability.
  • Stay Compliant with Taxes: Stay on top of sales tax, payroll tax, and income tax obligations (e.g. Florida’s 6% sales tax + county surtax on restaurant sales. File returns on time and plan for tax season year-round.
  • Plan for Year-End & Get Expert Help: Close out your books each year by preparing financial statements and tax documents (W-2s, 1099s, etc.), and don’t hesitate to consult a restaurant CPA for complex accounting or tax planning needs.

Below, we’ll dive into each step in detail with tips and resources for Florida restaurant owners.

Step 1: Separate Business and Personal Finances

The first step for any restaurant owner is to separate your business finances from personal finances. Open dedicated business checking accounts and credit cards for the restaurant, and avoid mixing personal expenses with restaurant costs. This clear separation simplifies bookkeeping and is crucial for tax purposes and liability protection. For example, legally structuring your restaurant as an LLC or corporation helps protect personal assets and makes it easier to keep finances separate. Always maintain distinct bank accounts for the business, use a business debit/credit card for restaurant purchases, and never pay personal bills from the restaurant account (or vice versa). By keeping clean boundaries between personal and business finances, you’ll have accurate records and a smoother accounting process when it’s time to do the books or file taxes.

Step 2: Choose the Right Accounting Software (e.g., Xero)

Modern cloud accounting software can be a lifesaver for busy restaurant owners. Selecting the right platform will streamline your bookkeeping and tax compliance. Xero is a popular choice for restaurants due to its user-friendly interface and robust features. Xero enables you to handle day-to-day financial tasks like invoicing customers, recording bills, and performing bank reconciliations with ease. Because it’s cloud-based, you can log in from anywhere (computer or phone) to check real-time financial data. Xero also integrates with many restaurant point-of-sale and expense apps, ensuring your sales and expense data flow automatically into your books. Other options include QuickBooks Online, FreshBooks, or Sage, but the key is to pick a system that fits your needs. Take advantage of free trials or demos to evaluate which software handles restaurant requirements (like inventory tracking or payroll) best. The right software will save you time and give you up-to-date insights into your restaurant’s performance. (For a closer look at Xero’s benefits, see our internal guide on cloud accounting with Xero.)

Step 3: Set Up a Restaurant Chart of Accounts

Once you have software in place, invest time in setting up a proper Chart of Accounts (COA) tailored to restaurants. A COA is simply a list of all the financial accounts you’ll use to track the business, grouped into categories. In restaurants, you’ll typically have accounts for: Assets (cash, equipment, inventory), Liabilities (loans, credit cards, sales tax payable), Equity (owner’s capital), Income (food sales, beverage sales, catering income), Cost of Goods Sold (food costs, beverage costs), and Expenses (rent, utilities, labor, marketing, etc). Setting up detailed sub-accounts can be very helpful; for instance, you might break down income into dine-in food sales, takeout sales, and alcohol sales, and similarly categorize COGS into food vs. beverage costs. This level of detail allows you to see exactly where your revenue is coming from and what your major expenses are. Most accounting software (like Xero) comes with a template chart of accounts, be sure to customize it for the restaurant industry. For example, include accounts for tips payable (gratuities you owe to staff), merchant fees (credit card processing fees), and any state-specific accounts (like Florida sales tax payable). A well-organized chart of accounts lays the groundwork for accurate reporting and makes it easier to analyze your finances later.

Step 4: Track Daily Sales and Income

Restaurants deal with a high volume of transactions each day, so daily sales tracking is vital. Don’t rely solely on your point-of-sale system. Establish an end-of-day routine to record and reconcile daily sales. Each day, compile the total sales from all sources (cash, credit cards, online orders, delivery apps, etc.). It’s a good practice to use a daily sales summary sheet or digital template to log: gross sales, sales tax collected, comps or discounts given, and the breakdown between cash vs. card receipts. This manual check acts as a balance against your POS reports.

After recording the totals, reconcile your cash deposits and credit card batches with what the POS reports. This helps ensure all cash makes it to the bank and that no sales are missed or entered incorrectly. Daily tracking also lets you see sales by category – for example, how much came from food vs. beverages or which menu item sold the most – which can inform your business decisions. If you notice labor costs creeping high relative to sales on a given day, you can adjust employee scheduling in real time. Over time, these daily records feed into your accounting software. You can either enter a daily summary journal entry in your software or integrate your POS with the accounting system to sync sales data automatically. The goal is to have complete and accurate income records for each day, which roll up into your monthly financial statements.

(Internal Resource: See our Restaurant Bookkeeping Services page for tips on daily sales recording and cash control.)

Step 5: Control Expenses and Manage Inventory (COGS)

Keeping expenses under control is especially challenging in the food service industry, where profit margins are thin. Start by recording every expense that the restaurant incurs. This includes obvious costs like food purchases, liquor orders, and payroll, as well as smaller expenses like cleaning supplies, menu printing, or that extra gallon of milk from the grocery store. Every purchase must be documented; save receipts and enter them into your accounting system or expense tracking app. This ensures your expense totals are accurate and you won’t forget to deduct legitimate costs at tax time. It’s a good practice to maintain an accounts payable system for vendor bills: record bills when received (for goods like meat, produce, or linens) and track their due dates. Paying vendors on schedule (and taking early payment discounts when offered) will strengthen your supply chain relationships and may save money.

Hand-in-hand with expense tracking is inventory management. In a restaurant, inventory (food and beverage stock) directly affects your Cost of Goods Sold and profitability. Implement a system to monitor inventory levels closely. Many restaurants do a weekly inventory count of key items (or at least monthly full inventory counts) to calculate COGS and identify any shrinkage or waste. Your accounting software or a dedicated inventory app can help value your inventory and even integrate with your POS to decrement stock as you sell items. By analyzing your usage and sales patterns, you can adjust ordering to avoid overstocking perishable goods that might spoil. Conversely, tracking inventory helps prevent running out of popular items.

Efficient inventory control also helps in calculating COGS accurately. Use the standard formula: Beginning Inventory + Purchases – Ending Inventory = COGS. For example, if you started the month with $12,000 of food inventory, bought $5,000 more during the month, and ended with $7,000 in stock, your food COGS is $10,000. Tracking this for food, beverages, and other supplies will show you exactly how much your menu is costing you. Aim to optimize your COGS by negotiating better prices from suppliers, managing portion sizes, and reducing waste. Many successful restaurants monitor the COGS ratio (COGS divided by sales) closely; if it spikes, it’s a signal to investigate theft, waste, or price adjustments. As a general benchmark, restaurants often target a prime cost (COGS + labor) of around 55–60% of sales, keeping within this range is key to profitability.

(Internal Resource: Our Restaurant Budgeting and Forecasting guide covers strategies to reduce food waste and control costs.)

Step 6: Manage Payroll and Tips Properly

Labor is typically the largest expense for a restaurant after food cost, so managing payroll and tips is a critical accounting task. First, decide if you’ll handle payroll in-house via software or outsource to a payroll service. Either way, set up a reliable payroll system that accounts for hourly wages, salaries, overtime, and any pooled or distributed tips. Restaurants have to navigate tip compliance: in the U.S., employees must report tips to you (the employer) if they exceed $20/month, and you’re required to withhold the appropriate income and FICA taxes on those tips. Set up a process for servers and bartenders to report their tips daily or weekly (many POS systems can produce tip reports). Maintain a separate ledger account for tip income and tips paid out, to keep these funds clear in your books.

Be aware of tip-related regulations. For example, the IRS requires that the total tips reported by employees each month are at least 8% of the establishment’s gross receipts, and Florida follows federal rules on tip pooling and minimum wage adjustments for tipped employees. As an employer, you also may be eligible for the FICA tip credit, a federal tax credit that can offset the employer’s portion of social security and Medicare tax on tip income above the minimum wage. To qualify, you must ensure all tipped staff report their tips and you file IRS Form 8846 with your tax return. This credit can save restaurants thousands of dollars annually, essentially rewarding you for properly reporting tip income.

In addition to tips, make sure your payroll system handles payroll taxes (withholding and matching Social Security/Medicare, federal unemployment, and Florida reemployment tax). File payroll tax returns (Form 941 quarterly, 940 annually, W-2s, etc.) on time to avoid penalties. Keeping tight control of payroll and tip recording not only keeps you compliant with labor laws and the IRS, but it also gives you insight into your labor cost percentage. You can then adjust staffing or store hours to balance service quality with labor efficiency.

Step 7: Reconcile Bank and Credit Card Accounts Regularly

Frequent reconciliation is one of the most important accounting habits for a restaurant (or any business). Reconciling means comparing your accounting records with external statements (bank accounts, credit card statements, merchant processor reports) to ensure they match. In a cash-intensive environment like restaurants, doing this monthly at minimum, preferably weekly or daily for sales deposits, is critical. For example, each day’s credit card batch total in your POS should match the deposit amount that shows up in your bank account (after merchant fees). Similarly, the cash you put in the bank should match your recorded cash sales minus any petty cash used for expenses. If there’s a discrepancy, investigate immediately; it could be an error in recording or a signal of theft or fraud.

Using your accounting software’s bank feed or import feature can simplify reconciliations. Software like Xero will pull in bank transactions automatically; you or your bookkeeper can then match each bank transaction to entries in your books. Make sure all sales, credit card fees, vendor payments, payroll debits, loan payments, and other transactions are accounted for. Regular reconciliation helps catch mistakes (like a missed expense entry or duplicate charge) early, when they’re easier to fix. It also ensures your financial statements are based on reality, not just what you think is happening.

As part of reconciliation, don’t forget to reconcile petty cash if you keep a cash drawer for incidental expenses. Count the petty cash regularly and track any withdrawals or top-ups in a petty cash log. Many restaurant owners also reconcile inventory usage periodically (comparing what usage the POS indicates vs. actual stock depletion) to detect theft or waste. By staying on top of reconciliations, you maintain the integrity of your books and can “close” each month with confidence that the numbers are accurate. This discipline will pay off especially at year-end and tax time, because well-reconciled books lead to easier reporting and fewer surprises.

Step 8: Review Financial Reports and Key Metrics Monthly

Accounting isn’t just about record-keeping, it’s about using the data to run your restaurant better. Each month, generate key financial statements and take time to review them. The primary reports are:

  • Profit and Loss Statement (Income Statement): Shows your revenue, expenses, and profit for the period. This lets you see if you made money and identify which costs are eating into your profit (e.g. food cost percentage, labor percentage).
  • Cash Flow Statement: Shows how cash came in and out (operations, investing, financing) over the period. Since restaurants deal with daily sales and frequent expenses, keeping an eye on cash flow ensures you have enough liquidity to pay bills and payroll.
  • Balance Sheet: Summarizes assets, liabilities, and equity at month-end. It provides a snapshot of financial health. For instance, is your bank balance growing or shrinking? Are you carrying more debt than last month?

When reviewing these, focus on a few key performance indicators (KPIs) relevant to restaurants. One crucial KPI is the Prime Cost ratio: the sum of your Cost of Goods Sold and labor costs, divided by sales. As mentioned, prime cost should ideally be under about 60% for a healthy restaurant. If your prime cost is too high, drill down into whether food costs or payroll (or both) are off, and take action (renegotiate prices, adjust menu pricing, reduce overtime, etc.). Other useful metrics: Gross profit margin (sales minus COGS, as a percentage of sales) and Net profit margin (what percentage of sales you keep as profit). Net margins in the restaurant industry are often in the 5-15% range, with finer dining on the lower end of volume but higher ticket, etc., knowing your margin helps set targets and pricing strategy.

Additionally, look at sales trends and operational ratios. For example, track your sales per seat or per day to identify busy vs. slow periods, then align staffing and marketing efforts accordingly. Monitor inventory turnover, which is how quickly you sell through your stock, to ensure you’re ordering efficiently. Check your labor as a percentage of sales each month; if it’s rising, it may be time to optimize staff schedules or cross-train employees. A good accounting process will also involve comparing your actual results to your budget or forecasts if you have them, to see where you’re off-target (our firm strongly encourages budgeting for restaurants to anticipate seasonal swings).

By reviewing financial reports regularly, you’ll spot issues early – perhaps a certain expense spiked or a menu item’s food cost is too high – and you can make data-driven decisions. Restaurant owners who understand their numbers can adjust menu pricing, portion sizes, or expense controls proactively, rather than reacting when it’s too late. If you’re unsure how to interpret the reports, your accountant or CPA can provide insights (and many accounting software tools offer visual dashboards now). Remember, what gets measured gets managed, so use your accounting reports to drive improvements in profitability and efficiency.

(Internal Resource: Our Restaurant Advisory Services include regular financial reviews and custom KPI reporting to help you benchmark and improve performance.)

Step 9: Stay Compliant with Taxes (Sales Tax, Payroll Tax, Income Tax)

Restaurants face a complex mix of taxes, so proactive compliance is essential. In Florida, for instance, sales tax is a big one: sales of prepared food and beverages are generally subject to 6% state sales tax plus any county discretionary surtax. That means every restaurant in Florida must register with the Florida Department of Revenue, collect the correct tax on each sale, and remit those taxes via periodic returns (typically monthly). Ensure your POS system is configured to apply the right tax rate on all taxable items, and keep track of sales tax payable in your accounting records. File the Florida DR-15 sales tax return on time each period – even if a month is slow or you were closed, you still need to file a zero return to avoid penalties. Pro tip: Florida allows a small collection allowance (up to $30) if you file and pay on time electronically, which is a nice incentive to be punctual.

Payroll taxes are another critical area. As covered in Step 6, you must deposit withheld employee taxes and the employer portions to the IRS and state. Federal requirements include filing quarterly Form 941 reports and annual Forms W-2 for employees (and W-3 summary). Florida doesn’t have state income tax on individuals, but it does have an unemployment tax (reemployment tax) that employers pay; make sure you register and file those reports quarterly via the Florida Department of Revenue. Keep meticulous records of wages, tips, and taxes withheld, not only for legal compliance, but also because these records feed into your year-end tax filings and help you claim deductions like the tip credit.

For income taxes, your obligations will depend on your business structure. If you operate as a sole proprietorship or a pass-through entity (like an S-corp or LLC taxed as such), the business income flows to your personal tax return. You’ll likely need to make estimated tax payments quarterly to the IRS (and to Florida if you have a C-corp, since Florida does tax C-corporations). Throughout the year, practice tax planning: set aside a portion of profits for your tax bill, consider working with a CPA to identify deductions and credits, and adjust your strategy as laws change or your business grows. Common restaurant tax planning moves include timing equipment purchases to maximize depreciation write-offs, tracking mileage for deliveries or catering, and taking advantage of credits (e.g. Work Opportunity Tax Credit for hiring veterans or other target groups). Also keep an eye on industry-specific breaks: restaurants can often deduct a higher percentage of business meal costs (currently 50% generally, sometimes 100% for certain years or promotions), and you should document any employee meals or discounts given, as they may be partly deductible or subject to tax rules.

A frequent mistake is letting paperwork pile up until year-end. Instead, stay on top of taxes year-round. Mark key deadlines on your calendar. Reconcile and pay monthly sales tax, submit payroll taxes on time (Florida, for example, requires reemployment tax each quarter), and have a running estimate of your income tax liability. By doing so, you avoid nasty surprises and last-minute scrambles. Remember, compliance isn’t just about avoiding penalties; it also positions your restaurant for success. When your taxes are handled properly, you can focus more energy on running the business rather than fighting fires with the IRS or state agencies. If this sounds overwhelming, the next step might be especially relevant for you.

Step 10: Prepare for Year-End Close and Seek Professional Help if Needed

The end of the year is crunch time for accounting. Year-end tax preparation for a restaurant means making sure all your financial data for the year is complete, accurate, and categorized correctly before filing taxes and issuing reports. Key tasks include: performing a thorough inventory count at year-end (to calculate final COGS and write off any spoilage or theft), reconciling all bank and credit accounts through December 31, and reviewing your financial statements for any inconsistencies. Gather all necessary documents for tax filing: payroll records (for W-2s and 941/940 forms), total sales and sales tax collected, business expense receipts, asset purchase records (for depreciation), and so on. Don’t forget any 1099-NEC forms for independent contractors (e.g. a contract cleaning service or freelance marketing consultant). Restaurants often have a few 1099 vendors and you need to report their payments by January 31. Also, verify you’ve accounted for all prepaid expenses or deposits, and adjust for any accrued expenses like the last utility bill of the year paid in January, etc., if you’re using accrual accounting. Taking the time to do a year-end review will surface any issues (missing invoices, mis-categorized items, etc.) while you still have a chance to correct them.

Year-end is also the time to maximize tax deductions. Go over expense categories and see if anything was overlooked. For example, did you track vehicle mileage for catering deliveries? Did you include the cost of uniforms or staff training? Restaurants have some special deductions and credits to consider, such as the FICA tip credit we discussed, or perhaps a credit for providing health insurance if applicable. A tax professional can help identify these. Additionally, ensure you are compliant with any 1095-C filing if you have 50+ full-time employees (ACA requirements).

Finally, know when to seek professional help. If all of these accounting tasks sound daunting, consider engaging a qualified restaurant accountant or CPA. An experienced CPA firm (like Cloud Accounting Group’s Restaurant CPAs) can take over bookkeeping, payroll, and tax prep, or simply provide guidance as needed. Outsourcing your accounting can free you to focus on operations, while also providing peace of mind that experts are handling complex areas like tax law changes, depreciation schedules, or multi-location accounting. Many restaurant owners start by doing the books themselves and later realize that partnering with a professional saves money in the long run, through better tax planning, error prevention, and financial analysis that spots opportunities. For instance, a CPA who knows the restaurant industry can advise on tax strategies such as cost segregation (accelerated depreciation on restaurant improvements) or whether to elect S-corp status for a growing business. They can also help design systems so you get real-time financial insights without the headache.

Completing accounting for a restaurant involves diligent daily habits and a big-picture view. By following these steps, from separating finances and using the right software, to tracking sales and costs, monitoring key metrics, and staying compliant with taxes, you’ll build a strong financial foundation for your restaurant. Good accounting not only keeps you out of trouble, but also illuminates ways to improve profitability and efficiency. Whether you run a cozy bistro or a fine dining establishment in Florida, these practices will help you make smarter decisions and achieve long-term success. And remember, you’re not alone: leverage tools like Xero and consider bringing in restaurant accounting experts when needed to turn your financial data into strategic growth. Here’s to closing your books with confidence and watching your restaurant flourish!

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