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How to Prepare a Chart of Accounts for Your Restaurant?

Last updated: 03 May, 2022 By | 6 Minutes Read

A chart of accounts is one of the best tools to record financial information itemized among categories they belong to, having a significant influence on other financial accounting functions. Accounting for restaurants is already challenging; in addition, preparing a vague list of all financial information can create chaos when it is used for reporting purposes. Therefore, preparing a chart of accounts helps ensure there’s no room for confusion and everything is presented in a well-organized manner.

What is the importance of a chart of accounts in the restaurant industry?

A chart of accounts allows you to look at a clear picture of where all your money is going and coming from. It helps you have a deeper look into your restaurant’s current financial position and provides sufficient helpful insights to project future trends of its financial performance. These projections can help you plan and take required actions well on time. Moreover, you will have a clearly-maintained record of transactions which you can use during tax season, saving your time and effort.

Apart from all that, a chart of accounts helps you generate three key financial documents, which are mentioned below.

P&L statement

The profit & loss statement, also known as the income statement typically shows costs and sales. This document can be utilized to determine the revenue earned and costs paid by your restaurant over a period of time (usually a month). The end goal is to help you identify the need for reducing costs or boosting sales.

Cash flow statement

A cash flow report enables you to track the cash coming in and going out of your checking accounts. This document helps you identify how much you are earning from operations and how much from external funding, calculate the amount of money available with your restaurant, etc. It also helps you read between the lines by understanding patterns of financial transactions, based on which you can prepare budgets for the future.

A balance sheet

A chart of accounts can also help you prepare this report which covers information about all your liabilities, assets, and equity. It shows you how much debt you are yet to pay off, your actual financial position. It is the best document to look for red flags that can literally help you protect from potential financial challenges that may arise in the near future.

Core advantages of using a chart of accounts for your restaurant business?

Accurate Data of Income & Expenses

It might not be that normal but have you ever received an invoice that has a different figure than what was actually deducted from your account via an auto-debit transaction? Chart of accounts is prepared using ledgers, receipts, and bank, credit card statements; and each entry in a COA is entered after necessary reconciliations. Tracking accurate numbers in terms of income and expenses help ensure preparing accurate financial reports.

Debt Evaluation & Payment Planning

As a restaurant owner, you must be well aware of your loans spanning short, medium, and long periods. Looking at a well-categorized debt structure can help strategically prepare a payment plan and schedule the same. Apart from that, you can determine and pay the top-priority debts (with the highest interest) first and then others following in order. This helps maximize cash flow and ensure budget adherence.

Easy, Precise, and Fast Tax Preparation

You know what tax season brings along; the need for paying business taxes before the due date and a long list of tasks to be done before filing the final tax return, such as;

  • Gathering receipts, invoices, bank statements, and other financial documents for the entire applicable fiscal year
  • Calculating total revenue before
  • Calculating taxable income
  • Looking for tax deduction possibilities

When you have a chart of accounts accurately prepared for all the previous months, you will be able to prepare your tax files easily in less time than usual.

Restaurant Chart of Accounts

While preparing the chart of accounts, you need to divide transactions into a few primary categories, which are described below.

  • Assets

Under this category, you need to list each asset account while also differentiating between them as fixed assets and current assets.

Liquid assets are the same as current assets – these are mostly cash and can be converted into cash over a period of time. In terms of the restaurant industry, these are checking accounts, monetary reserves, short-term investments, accounts receivable, and to name a few.

  • Liabilities

This is something you may be already aware of, and if not, the term itself explains it all. Liabilities are everything that your restaurant business owes. Ranging from accounts payable to credit card outstanding, active loans, to taxes owed, whatever you are yet to pay comes under liabilities.

  • Equity

Equity is what you have after subtracting liabilities from assets. Equity defines how valuable your restaurant is to you. The usage of equity accounts will depend upon the structure of your restaurant. Since a majority of restaurants are limited liability companies, let’s take a look at this relevant example of LLCs.

If you are the only owner of your LLC, you should maintain two different accounts –

1 – capital account

1 – owner’s draw account

The capital account involves information on all the investments made ever since the establishment of the business. The drawing account has information about transactions made from business accounts for personal use.

  • Revenue

This category includes the income generated by your restaurant from daily operations. This category is usually further divided into subcategories, such as the sale of food and sale of beverages, further broken down into types – mocktails, soft drinks, and hard drinks.

Some restaurants also sell non-consumable items, for example, toys or antiques or maybe special edition or branded crockery. There will need another sub-category for the sale of such items.

  • Expenses

These are your fixed expenses which include rent, utilities, insurance, payroll, etc. Information on all these expenses can be easily obtained from your restaurant’s invoice management system or other restaurant accounting software that records expenses.

Then they itemize it in the correct section—choosing to create subaccounts if further specificity for recording is needed.

Prepare your restaurant chart of accounts

Let’s take a quick look at what all should be included in a restaurant-specific chart of accounts:

Assets

  • Current assets
  • Fixed assets
  • Other assets

Liabilities

  • Current liabilities
  • Long-term liabilities

Equity

  • Assets minus liabilities

Revenue

  • Income from sales

Expenses

  • Primary costs
  • Operating expenses
  • Non-controllable expenses
  • Corporate overhead & other
  • Income tax return

According to this, you can prepare a COA for your restaurant and even use a more detailed format by including sub-sections. Here’s an example of sub-sections of the category – expenses.

  • Cost of goods sold (COGS)
  • Employee salaries
  • Employee insurance & retirement
  • Employee perks
  • Payroll taxes
  • Food cost
  • Labor cost
  • And add as per the items you usually pay for

Although this piece of writing will help you understand why and how to prepare a chart of accounts for your restaurant, how well you prepare it completely depends upon your accounting knowledge and skills. You most likely don’t have an accounting background as a business owner, and even if you do, how often do you get time for financial accounting? Most restaurant owners don’t; in fact, many of them spend extended hours sorting financial accounts and still couldn’t make it right.

    These are some of the reasons they outsource restaurant accounting services to professionals and specialists like us. At Cogneesol, we are a large pool of qualified, skilled, and regularly trained accountants who can help you prepare not only a COA but also streamline accounting functions, leverage your finance software, and optimize the entire accounting process. Serving more than hundreds of restaurants worldwide since 2008, we have the required knowledge, expertise, and experience to provide high-quality accounting services to help your restaurant manage finances better and make sound financial decisions leading to higher profitability and growth.

    To learn about our restaurant accounting services and pricing plans in detail, contact us today. Send us your queries via an email to info@cogneesol.com or talk to one of our experts over a call: +1 646-688-2821.

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