13 Accounting Basics You Need To Know

OK, you won't be an expert after reading this. But you'll be less confused.

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Dinis Tolipov © 123RF.com

Most hospitality pros aren’t blessed with an intuitive understanding of accounting procedures and terminology, and even if you’ve been running a bar or restaurant for years now, there’s always more to learn. If you don’t know your liabilities from your ass(ets)—and even if you do—take a look at these 13 commonly-asked questions accounting software experts at Restaurant Solutions, Inc. have compiled. We’re betting you’ll learn something to make doing your books a bit less daunting.

What are the main financial statements every business should have?
A profit and loss statement (P&L), balance sheet, and statement of cash flow.

Why does my profitability on my P&L differ from the amount of cash in the bank?
Being profitable is not the same as having cash on hand. Cash may be coming out of the bank to pay down outstanding loans, service debts, or for other services. That will affect your cash on hand (and bank balance) but not your overall profitability.

What is the difference between a trial balance and a balance sheet?
The main difference is that the trial balance lists the ending balance for every account. Normally, the balance sheet will total several accounts’ ending balances and use that figure for one line item.

Why doesn’t the cash balance on my balance sheet match what’s in my bank account?
The cash balance reflected on your balance sheet for your operating and payroll accounts will differ from your actual bank balance for a few reasons. This includes (but isn’t limited to): outstanding checks, deposits in transit, pending bank service charges, errors in company books, ACH payments and deposits that haven’t been recorded yet, and the timing of the bank reconciliation.

What is a bank reconciliation statement?
A bank reconciliation statement is a summary of banking and business activity that reconciles a business’ bank account with its financial records. It will outline deposits, withdrawals, and other activities affecting a bank account for a specific period of time.

How often should I review my financial statements?
Ideally, you should review your finances week in order to proactively manage your business.

How do I find my breakeven point?
A company’s breakeven point (BEP) is the point at which its sales exactly cover its expenses. To compute your BEP in sales volume, you need to know three variables: fixed costs, variable costs, and the selling price of the product. BEP is equal to total fixed costs divided by the difference between the unit price and variable costs. In other words:

Fixed Costs / (Price-Variable Costs) = BEP

What is the difference between accounts payable and accounts receivable?
Accounts payable (AP) is the amount a company owes because it purchased goods or services on credit from a vendor or supplier; AP are liabilities. Account receivable (AR) is the amount owed to a company for goods and services rendered; AR are assets.

What is the difference between cash and accrual accounting?
The difference between cash and accrual accounting lies in how the timing of sales and purchases are recorded in your accounts. Cash accounting recognizes revenue and expenses only when money actually changes hands, but accrual accounting recognizes revenue when it’s earned and expenses when they are billed (not paid).

How can I spread a large expense out over time instead of expensing it all at once?
Set up large expenses on an accrual basis. The full amount of the expense exists as a liability on the balance sheet until the time it has been paid for in full.

How does inventory play into the cost of goods and services (COGS) calculation?
Accurate COGS is a simple formula. You must know your beginning and ending inventory (INV) as well as purchases to calculate how much product is left on your shelves to identify your COGS usage.

Beginning INV + Purchases – Dnd INV = COGS Usage

At what threshold do you recommend I capitalize vs. expense?
A capitalization policy (or threshold) is a dollar amount, usually between $1,000 and $2,000. Qualifying expenditures above the threshold are recorded as fixed assets, and expenditures below it are recorded as expenses incurred. The policy is typically set by senior management or even the board of directors.

What is use tax?
Use tax is essentially the same as a sales tax, but is not applied when a product or service is sold. Instead, it’s applied when a merchant buys a product or service, does not pay tax on the initial purchase, and then converts the product for its own use.

Sydney Lynn is the Director of Client Advisory Services with RSI. She believes the modern restaurateur must be able to exceed the guest’s expectations without losing sight of financial sustainability. During her eight years at RSI, Sydney has helped hundreds of restaurant operators across the US achieve their goals through management team coaching while providing accountability and a sense of ownership over brand equity. Her 20+ years of experience within the industry previously awarded her with the opportunity to serve as VP of Financial/Operational Audit for a private equity firm that owned and operated over 130 restaurants

Don’t see your question answered here? Talk to us! Email your questions (and thoughts, opinions, and experiences—anything, really) to askus@diningout.com

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