In this article you'll get a brief glimpse into the world of restaurant accounting. I think you'll quickly see why accounting is something that every businessperson should understand (as well as why accounting is the world's most boring profession).

Now I know you're probably not an accountant and have no desire to be one, but as a businessperson, the more you know about the financial workings of your company the better. There's really no reason why you should be mystified, intimidated or in the dark about what your accountant or bookkeeper does.

It's unfortunate, but specialists in any profession have been known to take advantage of people they know don't have a clue about what they do. Knowing a few basic restaurant financial and accounting concepts will keep you from being in the dark and at the mercy of your accountant or bookkeeper.

The Restaurant Audit Trail

Have you ever wondered where the numbers on your financial statements come from and what your accountant does in the process? I believe most business operators have at one time or another. This brings us to what I refer to as the "Restaurant Audit Trail." An audit trail just tells you where the numbers come from that make up the financial information on your P&L, balance sheet and other financial reports.

In restaurant accounting, the numbers used to prepare your financial statements come from just 5 areas, sales, purchases, payroll, inventory and accruals/adjustments.

The first stage of the process is the preparation of what's referred to as the source documents. For example, in the sales area, the source document the bookkeeper uses to record sales comes from the daily sales report. The daily sales report is supported by a Z tape (end of day POS or cash register report), and cash and credit card deposit slips.

In the area of purchasing, the source documents are invoices, credit memos and possibly check stubs. In payroll, you have time cards and payroll registers.

After the accountant or bookkeeper obtains the source documents or reports such as a payroll register which summarized the source document transactions, they record this information into a specific file, or journal where it is accumulated until this information is posted or transferred into what accountants call the "General Ledger" or GL. The GL is a listing of all your accounts and expense categories. For example, all of your transactions involving cash are eventually posted to or reflected in your GL cash account. All of your liquor purchases get posted to the liquor expense account along with any beginning and ending inventory adjustments.

Once all of the transactions for a month or period are posted to the GL, the financial statements, your balance sheet and P&L can then be prepared.

Here's WHY I'm Telling You This

First of all, as you can see, this process of preparing your financial statements is not rocket science. Now what I described is a slight over-simplification obviously, but this really is an accurate overview of the restaurant accounting process and as you can see anyone can understand what's it's basically all about. Second point - if there's ever a number on your P&L or Balance Sheet that looks out of line or you don't understand how it was arrived at, you should be able to ask your accountant where it came from and they should be able to tell, even show you, in a common sense, logical manner, just how that or any other number was arrived at.

Let me give you an example: Say you break your food cost out to several different categories and your meat cost looks high so you want to know how the meat expense number was determined. Your accountant should be able to give you some type of account detail to show you exactly how that amount was determined. You might then see that last month's meat cost came from invoices from several suppliers, a credit memo and the beginning and ending inventory adjustments.

You might discover some irregularities like one invoice that was recorded twice, and chemical supplies being erroneously charged to meat. Without seeing a detail of the account, you'd probably never know that the problem was a bookkeeping snafu and not a meat cost problem. Just think about what would happen if you, an owner or manager, started catching a few of those problems. I can promise you, they'd happen less often.

Simplifying Accruals & Adjustments

Now when you talk about where the numbers come from, there's one area that can get a little tricky and that's the numbers that come from the Accruals/Adjustments category. Accruals and adjustments are nothing more than accountants' job security. An example of an accrual is an expense like property taxes that you might pay just once or twice year, but every month you are incurring some property tax expense whether you're actually paying it or not.

So the accountant "estimates," usually based on what was paid in prior years, the total property taxes for the year and "accrues" 1/12th of that amount every month so that your P&L gives you an accurate picture of your expenses and profitability.

Depreciation would also be included in this category. Depreciation is nothing more than a process of "allocation." For example, say you purchased some new kitchen equipment for $10,500. Would it be reasonable to show that $10,500 cost as an expense on your next P&L? Probably not because the kitchen equipment will probably be used for several years.

So what an accountant does is "allocate" the $10,500 cost over the estimated useful life of the equipment. If the useful life of the equipment is say 7 years, your depreciation expense would increase around $1,500 a year over the next 7 years. Often, for tax reasons, accountants will depreciate these types of assets consistent with tax law, but the concept is still the same.

Again, if you ever don't understand where your numbers are coming from or how they were arrived at, "ask." If your accountant can't tell you in a logical, common sense manner, it may be a sign that it's time to consider getting a new accountant.

Jim Laube is the founder and president of RestaurantOwner.com, a business resource center for independent restaurant operators.

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