Top 9 Restaurant Accounting Terms You Need To Know

Restaurant accounting terminology to busy restaurant owners is akin to a Doctor’s vocabulary to the average Joe. Not everyone speaks the language. However, understanding it is paramount to manage your money for your business lifeline – your accountant. How are operators supposed to know which are the most important and where they apply? Unless you’re an accounting or finance major, you most likely know only a few, if any, of these terms. As hospitality-specific accounting experts, we’ve rounded up the nine most important terms that all restaurant operators should know.

Glossary of Restaurant Accounting Terminology


#1. Cost of Goods Sold (COGs)

What is Cost of Goods in a restaurant?

COGS is the cost of the food and beverage products that your restaurant sells. It is often the most significant expense on a Profit and Loss Statement. Since your goods pertain to your food and beverage inventory, Cost of Goods for restaurants is determined with the following equation:


Why should I know this?

Making a profit is the most crucial goal for any restaurant owner or manager. Knowing your COGs in relation to your revenue helps you control these costs. Additionally, it ensures you are putting the most to your bottom line. Understanding this is important to run a profitable business.


#2. Operational Payroll

What is Operational Payroll in a Restaurant?

Operational payroll is the facet of payroll that operators have the most control over. The areas of payroll that this accounts for are all hourly and tipped positions that make up the FOH (front of house) and BOH (back of house) employees.

Why should I know this?

Restaurants are among the most labor-intensive industries, and labor is one of the largest line items on your Profit & Loss Statement. Keeping control of labor expenses can be one of the best ways to increase profit and contribute to the success of your business.

Adjusting weekly schedules and pro-actively regulating the clock-ins, clock-outs, and how many employees you have on the clock compared to daily sales are critical tasks tied to achieving your financial goals.


#3. Gross Profit After Prime Costs (GPPC)

What is Gross Profit After Prime Costs in a Restaurant?

Gross Profit after Prime Costs (GPPC) is the profit your restaurant makes after deducting the costs associated with making and selling your food and beverage, i.e., Labor and COGs.

Gross profit will appear on your restaurant’s income statement and can be calculated with this formula:


Why should I know this?

Gross profit margin is generally significant because it is the starting point towards achieving a healthy bottom line NET Profit. When you have a high gross profit margin, you’re in a better position to have a substantial operating profit margin and strong NET Income.

The higher your gross profit margin for a newer restaurant, the faster you reach the break-even point and begin earning profits from basic business activities. The ideal % of GPPC will vary depending upon specifics to your restaurant; but, a rule of thumb would be for your GPPC to be 35% or higher.

Additionally, having a higher GPPC ensures that you will have enough revenue to cover the fixed and semi-variable costs of operating your business.

RELATED BLOG: How Do Small Business Restaurants Make a Profit?



#4. Net Operating Income (NOI)

What is Net Operating Income in a restaurant?

Net Operating Income or NOI is the profitability or loss after factoring in your revenue minus expenses. Revenue may not solely be food or beverage sales but can include catering, room rentals, merchandise, and more.

In the same sense, expenses are more than just Cost of Goods and paying your people. Supplies, rent, utilities, advertising, and more will be deducted from your revenue to arrive at your NOI.


Why should I know this?

NOI is the best way to grade your operational financial health. Knowing where you’re at with your NOI is valuable for more than just profitability. It shows you the strength and sustainability of your brand. You can use this to evaluate your potential for future growth. A healthy NOI can also be used to leverage decisions to reduce debt or reinvest in your business.


#5. Accounts Receivable

What is Accounts Receivable in a restaurant?

In the simplest of terms, Accounts Receivable is “money owed to a company by its debtors.” Examples of this would be Whole Sale Accounts or House Accounts.

Why should I know this?

Accounts Receivable is an essential factor in a company’s working capital as this is an Asset. This dollar value will directly affect the business’s overall bottom line (Asset vs. Liability).

Companies can use their receivables as collateral for borrowing money. Therefore, keeping your Accounts Receivable balance reconciled should always be a best practice. Also, holding your debtors accountable for payment terms should be non-negotiable.


#6. Accounts Payables

What are Accounts Payables in a restaurant?

Payables are amounts for items or services that have not yet been paid. They live on the Balance Sheet and are the sum of money owed at a future date. These can include amounts owed to vendors, tax agencies, credit cards, or loan lenders.

Why should I know this?

It’s important to understand that the business’s revenues need to cover both the expenses and the payables that the business owes.

When reviewing your break-even analysis, factor in payments that will be made on debt, so you have an accurate goal for your weekly sales. Keep an eye out on your Balance Sheet for any negative payables, as this will signify an inaccuracy in the financials.

#7. Assets

What are Assets on a Restaurant Balance Sheet?

What you OWN! An asset is a resource owned by a company that has future economic value and can be measured and expressed in dollars. Assets can include your petty cash, inventory, kitchen equipment, computers, furniture, or any other large purchase that adds value to your business. Assets are typically listed on your balance sheet at cost or lower.

Why should I know this?

It is important to understand your asset status because assets lose value over time and can affect your cash position when you need to replace them. Because they live on the Balance Sheet, profitability won’t be affected, but your cash flow will be. If you were ever to sell your business, you’d try to get the highest amount of value for the assets that you own.


#8. Liabilities

What are Liabilities on a Restaurant Balance Sheet?

A liability is money you owe or have retained for a future sale that will later be expensed or redeemed within the restaurant.

Restaurant liabilities live on your Balance Sheet and don’t directly impact your financial statement until the expense is paid, which in turn reduces the liability owed.

Examples of liabilities in a restaurant can include payablescredit card tips owed, payroll taxes, and amounts received in advance for future sales, including gift cards.

Why should I know this?

Knowing where your Liabilities stand is crucial to understanding the true cash position of your restaurant. You’re forced to factor in what you owe (like your gift card balance that has not been redeemed or catering/banquet deposits).

Furthermore, consistently checking the balance ensures the integrity of your business by guaranteeing all credit card tips due are paid. By maintaining accurate liabilities on the Balance Sheet, you can show the actual financial position of your business and avoid significant expenses hitting the Profit and Loss Statement all at once.


#9. Cash Flow

What is Cash Flow in a restaurant?

One of the most important parts of owning a restaurant, or any small business for that matter, is understanding your cash flow.

Simply put, cash flow is the amount of cash coming in versus the amount of cash going out of your business on a daily, weekly, and period basis.

Cash flow indicates actual changes in cash, as opposed to accounting revenues and expenses. It also takes into account what you own. Think of the inventory on your shelf and what you owe – such as bank loans.

Why should I know this?

Without sufficient cash, you can’t cover payroll for your staff, pay your vendors, maintain your equipment, or fund marketing campaigns to build sales.

By analyzing your cash flow on a weekly basis, you can assess how your sales and the corresponding cash flow ebb and flow over time. Doing this allows you to plan for seasonal times when cash reserves may be an issue.

Fluctuating inventory values may come to light, emphasizing the need to tighten up your purchasing procedures.