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home | Insights! | Accrual Accounting a . . .
 

'Accrual' Accounting and Why It is Preferred for Restaurants

"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 recorded only when payment for the expense 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), most operations pay their bills "on account," that is, after the products are delivered and after 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 tools to monitor and manage the real-time costs, expenses and key margins of the restaurant.

Therefore, accountants who are familiar with the transactional realities of restaurants typically recommend that restaurants use the accrual basis of accounting so sales and the costs and expenses associated with those sales are recorded and reflected in the financial statements of the same month or period.


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