Accrual basis accounting means that revenue is “documented” or “recognized” when it is received and expenses are “documented” or “recognized” when they are incurred, regardless of when cash is received or paid.
In “cash basis” accounting, revenue or sales are documented only when the cash from sales is received, and costs or expenses are recognized only when payment for the expenses is made. Although many restaurants receive cash when the sale is made or shortly thereafter (e.g. in the case of a credit card settlement, gift cards, 3rd party delivery apps settlement), most operations pay their bills “on account” or “enjoy a credit period of 15 to 30 days”, that is, after the services are rendered and the products are delivered.
Therefore, using the cash basis of accounting in most restaurants would result in potentially significant costs that are incurred in one month and recorded when paid in the next month. This would render the financial statements of most restaurants useless as tolls to monitor and manage the real-time costs, expenses, and key margins of the restaurants.
For a more precise and proper depiction of your restaurant’s financial performance, the accrual accounting method is more ideal. The method levels out your restaurant earnings over time by accounting for all the expenses and revenues as they are generated.
However, the accrual accounting method does not provide any recognition of cash flow when preparing the documents. This means that the restaurant may appear to be highly profitable during a particular period, when in reality, it is operating on empty bank accounts. Without careful observation of your business cash flow, the accrual basis of accounting can have potentially devastating consequences to your restaurant.
Therefore, we as restaurant accounting specialists, who are familiar with the transaction realities of QSR and Fast Casual franchisees, recommend that accrual basis of accounting be used.
Fruxient has been providing bookkeeping services since 2015. Our exceptional and integrated procedures along with a deep comprehension of Restaurant accounting allows us to delight Restaurant owners by providing comprehensive accounting and strategic services. By hiring us, you get a one-stop solution to all your accounting needs. We help you simplify your processes to streamline activities and improve efficiency. We do not simply quote figures to you. We process the data and provide you with an insight report which has all the relevant ratios and charts, which can help you make informed decisions quickly. We track and trace cash flows to minimize revenue leakage and maximize profits. Our team is here to provide you with analytics, in addition to accurate and well-timed financials, that will upgrade your company’s financial health.
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