Restaurant Accounting: Food Costs, Tip Reporting, and Inventory
Small Business · 2026-01-15 · 7 min
Restaurant accounting has industry-specific challenges: perishable inventory, tip reporting, food cost ratios, and high-volume cash transactions. Here is how to handle them.
Food cost percentage is the most important metric in restaurant accounting. It measures the cost of ingredients as a percentage of food revenue. The industry target is 28-35%. Above 35%, your menu prices are too low or your portions are too generous. Below 25%, you might be skimping on quality. Track this weekly, not monthly — food costs can spike quickly from waste, theft, or supplier price changes.
Tip reporting is a compliance obligation, not optional. Employers must report all tips to the IRS, including cash tips that employees report. If actual tips fall below 8% of gross receipts, the employer must allocate the difference. Getting tip reporting wrong triggers both IRS penalties and employee disputes.
Inventory management for restaurants is challenging because inventory is perishable. A spoiled case of produce is a direct hit to your food cost. Count inventory weekly — at minimum, your highest-cost items (proteins, seafood, specialty ingredients). Monthly full counts catch everything else. Compare actual inventory to theoretical inventory (what you should have based on sales) to identify waste and theft.
Cash handling in restaurants requires extra controls. Daily cash counts, separation of duties (the person who counts cash should not be the person who deposits it), and reconciliation of POS reports against actual cash. Restaurants that handle cash poorly lose 2-5% of revenue to theft and errors — on $1 million in revenue, that is $20,000-$50,000.
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