QSR Accounting – Why is Accrual Method of accounting better?
Accrual basis accounting means that revenue is “recorded” or “recognized” when it is earned and expenses are “recorded” or “recognized” when they are incurred, regardless of when cash is received or paid.
In “cash basis” accounting, revenue or sales are recorded 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 from sales when the sale is made or shortly thereafter (e.g. in the case of a credit card settlement, gift cards, 3rd part delivery apps settlement), most operations pay their bills “on account” or “enjoy a credit period of 15-30 days”, that is, after the products are delivered and services are rendered.
Therefore, using the cash basis of accounting in most restaurants would result in potentially significant expenses that are incurred in one month and recorded when paid in a subsequent 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 accurate and proper representation of your restaurant’s financial performance, the accrual accounting method is more ideal. The method smooths 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 awareness of cash flow when preparing reports. This means that the restaurant may appear to be very profitable during a specific period, while in reality, it is running on empty bank accounts. Without careful monitoring 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, we recommend that accrual basis of accounting be used.
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