Bars and restaurants are mainly cash businesses that generate much of their revenue from the sale of perishable items. These businesses carry inventory and often change their inventory and menu options to meet the demands of their customers. Both the cash and accrual accounting methods are ideal accounting methods for these businesses. However, needs, operations and accounting preferences are what determine which accounting method is best for the specific business.
Cash Method
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The cash accounting method, or cash basis, is the most commonly selected accounting method for bars and restaurants. This accounting method allows businesses to record their generated income when cash is received from services rendered or paid for expenses and costs. Activities are recorded when cash is exchanged. Since most bars and restaurants require their customers to pay for their food, spirits and services immediately upon receipt, the cash basis becomes the ideal accounting method.
Considerations
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Although the cash basis is the easiest accounting method, it is not necessarily the most accurate method for determining activity. The cash basis does not recognize delayed payments from payment plans and credit accounts. For instance, under the cash basis, the restaurant accounts for its vendor deliveries only when it pays for the deliveries. However, many restaurants have delivery accounts with their vendors that allow the restaurants to pay for their deliveries weeks, and even months, after the deliveries have been accepted. When viewing the accounting activity, the cash basis may show that the restaurant experiences large, periodic delivery expenses when, in fact, the deliveries are smaller and occur regularly.
Accrual Method
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Unlike the cash basis, the accrual method accounts for transactions as they occur. The revenue and expenses are recorded at the time of the transaction, regardless of when cash is actually exchanged or payments are made. With this method, analysis of the activity shows a more accurate viewpoint of how expenses are incurred and income is generated. This method allows restaurants to capture a clearer understanding of how income compares to expenses.
Requirements
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Bars and restaurants that generate less than $1million per year have an option to choose from the cash or accrual accounting methods. For these businesses, there are no right or wrong choices. However, the U.S. Internal Revenue Service requires all businesses, including bars and restaurants, to use the accrual accounting method when the business generates more than $1 million per year. If the business elects to use the cash method, it is required to complete IRS Form 3115 Change of Accounting Method and await response from the IRS before formally switching to the cash method.
