What is a restaurant chart of accounts?
A restaurant chart of accounts is a tool that allows you to track and manage your financial transactions in an organized way. This system can be used for both small and large businesses, and it can help you keep track of your expenses, income, and other important financial information.
What is a Restaurant Chart of Accounts and How To Set One Up
What is a Restaurant Chart of Accounts?
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Money is the most important element that keeps a business running, and it's therefore imperative for businesses to constantly monitor their financial health. For the restaurant industry, where the profit margins are usually slender, the smallest cost escalation can cause a hugely adverse impact on net profits.
It stands to reason that restaurants must have efficient accounting systems and processes in order to closely track the money flowing in and out of their operation.
Restaurant accounting is facilitated to a great extent through a chart of accounts. This is essentially an exhaustive list that identifies account types, details each account, compiles account balances and categorizes financial transactions into clear compartments like revenue, assets, equity, liabilities, cost of goods sold (COGS), expenses, and so on.
A restaurant chart of accounts, therefore, arranges and itemizes diverse pieces of information so that knowledge can be gained on the state of every account. It is akin to an index of each account in the general ledger of the company, arranged over a period of time. A chart of accounts is usually divided into sub-categories, such as expenses and income recorded by menu item and/or restaurant location.
What Does a Chart of Accounts Contain?
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A restaurant chart of accounts contains at least seven categories, each assigned a four-digit number. The categories are-
1. Assets (1000s)- This is a list of asset accounts, divided into current assets and fixed assets. Current assets refer to liquid assets that are either already in the form of cash or may be turned into cash within one year. They comprise 'accounts receivable', bar inventory, food inventory, savings accounts, short-term investments, etc. On the contrary, fixed assets are bought for the long term and are not expected to be turned into cash anytime soon. Building, land, and equipment are examples of fixed assets.
2. Liabilities (2000s)- This category refers to the amount an organization owes. It includes accounts payable or money owed to suppliers, taxes to be paid, and so on. Accounts payable is entered as a current liability in the balance sheet and is important for cash flow management.
3. Equity (3000s)- It measures the amount left after deducting liabilities from assets. It essentially gauges the value of the company to the owners. A single-member limited liability company (LLC) or a sole proprietorship must have a capital account and an owner's draw account. While the former tracks all investments since the start of the business (plus/minus net yearly gain/loss), the latter monitors the money withdrawn for personal purposes. The 'equity' category includes accounts related to retained earnings, capital contribution, capital stock, rental fees, and shareholder distribution.
4. Revenue (4000s)- This category measures the income generated from day-to-day operations. Revenue in a restaurant, for example, mostly comes from food sales and beverage sales, divided by type, such as seafood sales, a-la-carte sales, buffet sales, beer sales, wine sales, and so on.
5. Cost of goods sold (5000s)- This refers to the direct cost of producing the items sold by a company. It can be calculated by summing up the starting and purchased inventory values and subtracting the value of the ending inventory. In the case of a restaurant, it refers to the cost of ingredients and labor.
6. Expenses (6000s)- This account includes overhead expenses or ongoing costs needed to run a business, and direct operating expenses that directly go into production. Overhead costs include those incurred on rent, water, electricity, and other utilities; insurance; property taxes; licensing fees; etc. Operating expenses include costs incurred on salaries, machinery, and raw materials. Unlike operating costs, overhead costs don't vanish if the business stops production.
7. Other expenses and income (7000s and 8000s)- Examples of these are rental/temporary expenses, the interest generated on investments, etc.
Knowing how to set up a restaurant chart of accounts is vital for sound finances and a good business plan.
Many restaurateurs don't know how to set up a chart of accounts, which can lead to financial problems.
Why is a Chart of Accounts Central to Bookkeeping?
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A chart of accounts is a very useful tool for restaurant bookkeeping. It tracks money coming in and offers a clear idea to business owners regarding the source of earnings. By doing so, a chart of accounts facilitates decision-making. Detailed knowledge of the company finances -- gathered from a chart of accounts -- comes in handy when the company is in dire need of cash, and business owners can then decide which assets they can convert into cash.
Detailed knowledge of debts provided by a chart of accounts, moreover, allows organizations to devise strategies for their payment schedules, stick to budgets, and maximize cash flow.
Restaurants are also able to get a fair idea of their expenses, on the basis of which, adjustments can be made in terms of changing situations. Accordingly, funds allocated for purchasing and maintaining stocks and employing workers can be increased/decreased on the basis of current and/or projected demand. Businesses can also identify areas that offer good returns and call for greater investments, while ways to prevent unnecessary expenses can also be determined.
A detailed view of expenses and sales, therefore, allows restaurants to identify menu items that are profitable and those that receive lukewarm customer response. The restaurant can then strategize on which menu items to prioritize and spend more on. Restaurant accounting through a chart of accounts also allows food businesses to avoid purchasing too much or too little, resulting in food waste and stock-outs.
Similarly, in the case of a restaurant operating across multiple locations, a chart of accounts specific to a unit shows how well/poorly the unit is functioning. This data lets restaurant owners decide on calibrating spending to further strengthen a well-functioning unit or provide a helping hand to a struggling unit.
Financial information gathered through a chart of accounts also lets organizations take a call on continuing/expanding/scaling down discounts, customer rewards, and loyalty programs and decide on whether and to what extent the existing business can be expanded. This includes decisions on boosting seating capacity, buying sophisticated technology, wheeling out new menu items, and so on.
Moreover, a chart of accounts furnishes vital information that businesses rely on during tax computation and filing.
How to Create a Chart of Accounts
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Here's a step-by-step guide that will help you create a chart of accounts for your business-
1. Make use of broad account types- These allow you to arrange the finances of your business by broad categories. As discussed earlier, there are seven main categories in a chart of accounts, namely assets, liabilities, equity, revenue, cost of goods sold, expenses, and 'other' earnings and expenses.
2. Create sub-accounts- When doing so, keep in mind the type of your business. For service-based organizations, for example, there are certain common accounts like accounts receivable, accounts payable, cash, sales from services, supplies, wages, office rent, income tax payable, and so on. Each of these sub-accounts can then be distributed among the relevant broad account categories. For instance, both the accounts receivable and cash accounts may be put under 'assets'.
3. Assign numbers to your broad accounts and sub-accounts- As mentioned in an earlier section, a chart of accounts uses a four-digit number for each account. Therefore, all accounts falling under 'assets' may be assigned a number between 1000 and 1900. Accordingly, savings account may have a value of 1020, accounts receivable a value of 1100, wine inventory a value of 1200, and so on. Likewise, accounts under liabilities (accounts payable, loans, payroll, etc.) may be numbered between 2000 and 2900, those under equity (retained earnings, capital stock, shareholder distribution, etc.) numbered from 3000 to 3900, those under revenue (food and beverage sales, catering fees, merchandise sales, etc.) numbered from 4000 to 4900, and those under expenses (utility bills, cleaning charges, employee meals, etc.) may be numbered from 6000 to 6900. COGS may be numbered 5000.
What is Accounting Software?
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Accounting software solutions help in the creation and analysis of chart of accounts. These are computer programs that help accountants and bookkeepers report and record the financial transactions of an organization.
Restaurant accounting software allows various types of financial information like purchase orders, sales reports, invoices, payroll data, sales projections, etc. to be generated quicker and with a greater degree of accuracy than manual accounting methods. Accounting software automates various processes and helps stamp out human error. It also produces in-depth data analysis and actionable reports.
Accounting software produces real-time data covering different time periods, which serves to make accounting extremely efficient.
Accounting software straddles various aspects of restaurant management such as workforce management, supply chain management, inventory management, customer relationship management, time and task management, food safety management, and sales.
You need to set up a restaurant chart of accounts from scratch, but you don’t know how to go about it.
Don’t sweat, this article has you covered.
Benefits of Accounting Software Over Spreadsheets
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Accounting can be automated with the help of software, which allows restaurants to substantially reduce their dependence on accountants. Technology, furthermore, ensures that inadvertent errors can be done away with and that the accounting exercise is done with unwavering consistency and accuracy.
In this respect, accounting software is better than spreadsheets. Spreadsheets require some degree of manual effort and errors can easily creep in while copying and pasting values or shifting content out of cells. The complexity of Excel formulae makes them error-prone too.
Spreadsheets cause even more confusion because each stream of income needs a separate spreadsheet to monitor earnings. Consequently, the number of spreadsheets tends to rise as more and more services are offered, and soon the number of spreadsheets may become unmanageable.
Software solutions, however, ensure that accounting is clean, streamlined, and hassle-free, giving businesses a complete view of their financial position. They help reconcile cash transactions with bank statements, thereby giving business owners a clear picture of how they are placed in terms of cash. Sophisticated accounting software also consolidates various strands of financial information in a single place to ensure that data analysis and interpretation are a cinch.
The advantage of accounting software also lies in its ability to integrate and borrow from the various elements of the restaurant management system. It uses this data to create comprehensive financial reports and deep insights in the form of attractive visuals and layouts. Accounting software also helps in demand/sales forecasting.
Software solutions are a real boon for organizations at the time of tax filing too, and automated technology computes and files taxes on behalf of users. They also act as a database of common tax forms.
An added advantage of accounting software over spreadsheets is that the former maintains an audit trail, which helps in preventing fraud, while Excel spreadsheets, particularly, are prone to fraud because data can be altered easily and it's difficult to determine who made the changes.
Top 3 Accounting Software for Restaurants
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1. Zip Reporting-
This software solution gathers and consolidates complicated financial information in a single location. Zip Reporting converts data into attractive visuals that become very easy to comprehend and hence, facilitates the generation of detailed and actionable insights. The software can produce data for several locations and all this data can be accessed from a single location. Zip Reporting is a cloud-based restaurant accounting platform that allows data to be accessed in real-time and viewed from any location and at any convenient time. It ensures visibility on every aspect of the functioning of a business in a way that makes perfect sense across different devices. Zip Reporting can be downloaded from the Hubworks restaurant app store.
2. Quickbooks Online-
This software solution lets businesses generate customized invoices as well as sales receipts in a frictionless manner. Thanks to the banking integration it supports, it is possible to automatically update financial statements as well as transactions. This software comes with customizable dashboards and reports, which allow the real-time tracking of company finances. Users can access accounts and manage operations from a distance and at any convenient time. Employee time can be tracked with the help of this software. Moreover, time can be conserved thanks to the payment scheduling feature.
3. Sage Intacct-
This cloud-based platform automates complex billing processes, thereby streamlining accounting. With the help of Sage Intacct, multiple accounts can be monitored and real-time visibility can be gained into accounts. This leads to efficient management of cash. The software ensures serves to hasten and automate quote-to-cash cycles, or sales cycles starting from the sharing of a quote to the sealing of the deal. Sage Intacct has strong reporting features, the quick generation of insights, and on-demand data analysis. Users can select from over 200 data visualization options and customize the manner in which data is presented.
You're looking for a reliable accounting software for your restaurant, but you don't know which to go with.
This article lists the best accounting software for the restaurant industry to make the decision easier for you.