When inventory is accounted for on a Periodic basis the cost of sales is calculated as follows:
- Beginning Inventory
- + Purchases
- - Ending inventory
- = Inventory Used
The Cost of Food Sold includes the purchase of:
- dairy products, meats
- dried and canned goods
- non-alcoholic beverages (i.e. soft drinks, juices, milk) and
- miscellaneous food items.
The Cost of Beverage Sold includes the purchase of:
- beer and
- other miscellaneous alcoholic beverage items.
Sundry costs are those costs associated directly with Sundry sales. For example, if cigarettes and sweatshirts are tracked as Sundry sales, then the associated product costs are the Sundry Cost of Sales.
Total Cost of Sales
The Total Costs of Sales is the total of food, beverage and sundry costs. These Total Costs are compared to Total Sales.
The Gross Margin is the portion of the revenue left after the Total Costs of Sales have been deducted. Success for a restaurant often hinges on how well the Gross Margin is controlled. Thus, this sub-total requires careful monitoring by management.
Salaries, Wages and Benefits
The total cost of Salaries and Wages for all restaurant staff (hourly and salaried employees, and management) are included in this category. Also included are any bonuses paid, or payable. While the costs of Salaries, Wages and Benefits are reported as one amount in the Income Statement, management may wish to separate Salaries and Wages from Benefits in a separate schedule. This will allow management to monitor the relationship of Benefits to Salaries and Wages.
Employee benefits, include, but are not limited to, the following:
Mandatory Benefits (may vary by Province):
Employer's portion of Canada Pension (CPP)
Employer's portion of Unemployment Insurance (UI)
Employer's Health Tax (EHT)
Worker's Compensation (WC) and
- Employee meals;
- employee social events;
- income sharing; and,
- other employee benefits.
Occupancy expenses include:
- Rent, both fixed and variable (e.g. percentage of gross sales)
- business and property taxes and
- property insurance.
Operating expenses are costs attributable directly to running the restaurant and include, but are not limited to, the following:
- Costs of linen rentals and laundry
- utilities (e.g. heating, lighting, power, gas, hydro)
- repairs and maintenance
- equipment rentals
- contract cleaning (e.g. night cleaners, window washing, carpet cleaning)
- bar supplies (e.g. swizzle sticks, bar napkins, straws, corkscrew)
- supplies (cleaning, paper, and guest supplies);
- automobile (e.g. car payments, insurance, repairs and maintenance, gas and oil);
- decorating (e.g. flowers, plants, centerpieces, display tables);
- printing and photocopying (e.g. menus and wine lists);
- incidental costs of replacing china, glassware, silverware, utensils, linens and uniforms (the original cost of these items are accounted for as Fixed Assets); and,
- miscellaneous (costs directly related to the operation of the restaurant but not allocated to the above expense classifications).
General and Administrative
General and Administrative expenses include costs related to the general office, accounting, personnel, and credit card and collection activities. General and Administrative expenses include the following:
- Office supplies (e.g. paper, calculators, pens)
- photocopying and data processing expenses (typing, costs associated with updating the accounting records through an outside data processing centre)
- travel and entertainment
- uncovered balances in the cash over(short) account
- credit card commissions
- dues, fees and licenses
- liability insurance (property insurance is an occupancy expense, while automobile insurance is an operating expense
- professional fees (e.g. bookkeeper, accountant, lawyer, or consultant)
- security (security system, or security personnel)
- capital taxes
- bank charges and
- miscellaneous (e.g. costs of incorporation)
Marketing covers all the expenses associated with promoting and marketing the restaurant, including:
- Paid advertising
- complimentary drinks or meals
- market research
- public relations and
Where significant amounts are spent on a specific marketing activity it is useful to track the associated expenses separately. Promotions that involve providing complimentary food and/or beverages should be broken down by food, liquor, beer and wine.
This category is necessary in restaurants, nightclubs, bars or lounges, where entertainment represents a significant expense. In restaurants where entertainment consists of simply providing music through a sound system, the cost of providing such music can be included in Operating expenses. Entertainment expenses include:
- Mechanical music
- cost of hiring musicians/performers
- booking agents' fees
- transportation and accommodation for artists
- equipment rentals
- piano rental and tuning costs and
- costs of meals served to musicians/performers
While Royalty Fees are a type of marketing expense, they are usually of sufficient significance that they should be reported separately. Royalty Fees include payment for continuing rights under a franchise agreement and for general or specific services provided by a franchisor. It is not necessary to include this line item on the Income Statement if the restaurant is not a franchise operation.
Operating Income summarizes the financial operating performance of the restaurant. This line item is a key figure in valuing the business and is generally used as a base for employee incentive and profit sharing programs.
Operating Income represents profit after all variable and fixed operating expenses. All subsequent deductions are non-operational expenses and include, for example:
- Interest expense which relates to the financial structure of the restaurant (amount of debt)
- Depreciation/amortization, which is a non-cash flow item; and,
- Income Tax, which is paid after all operational expenses are deducted
The Interest expense represents the costs associated with all outstanding short-term and long-term loans to the restaurant. The interest owed will be, for example:
- The interest on long-term debt used for the development of the restaurant
- the interest on short-term debt (i.e. debt repaid within one year)
- the interest on an operating line of credit and
- the interest on any other cash loan used by the restaurant
Depreciation & Amortization
Depreciation is the method for writing down the cost of tangible or fixed assets, while Amortization is the method used to write down certain intangible assets (e.g. Franchise Fees). Depreciation and Amortization expenses do not represent cash outlays for the restaurant. Rather, they represent an allocation of the costs spent on purchasing an asset.
Net Income is the residual balance after all of the above expenses have been deducted from the reporting period's sales.
This article is a short summary of Canadian Restaurant Accounting, Second Edition, 2009
Free download: Use or adapt this Canadian Restaurant Chart of Accounts to record and track revenue and expense data.
About the author:
Doug Fisher, is president of Toronto-based FHG International Inc., a leading North American restaurant, foodservice and franchise management consulting firm. FHG specializes in franchise development, litigation support, business and strategic planning, and operations management, among other disciplines. Doug is author of 5 books including the national restaurant accounting standards, and is the recipient of two major international awards for consulting service excellence. You can reach Doug at 416-489-6996 or firstname.lastname@example.org or www.fhgi.com.