Restaurant accounting is usually straightforward. A product or service is sold and paid for on delivery and recorded as revenue. However, there are occasions in the restaurant business when accounting transactions aren't simple cash flow, and you end up with deferred revenue.
Regular revenue is revenue restaurants recognize on sales for the day from food, alcohol and services provided. Deferred revenue is money restaurants collect from a customer without providing any goods or services.
In the restaurant industry, most of the services and products sold on a day-to-day basis is considered revenue, but there are occasions when sales would be recorded as deferred revenue. Here are a few.
Catering
Catering, banquets, holiday parties and corporate events can be big business for restaurants. These events usually come with a contract requiring an advance deposit.
Often restaurants will request 50% down and 50% when the event is complete. In those situations, any money collected upfront before the event is considered deferred revenue since payment was collected before the service or product was provided.
Loyalty programs – not deferred until it is
Restaurant loyalty programs can be confusing. Generally, these programs are liabilities.
Customers in the loyalty program spend money to earn points which can be used to redeem a free product. Whether it’s ultimately determined to be a liability or deferred revenue depends on the type of accounting processes you use.
For example, customers receive one point with a value of $1 for every $100 they spend. As a customer spends $100 on food, restaurants recognize $99 of that as revenue and record $1 or 1% as loyalty points.
If you use generally accepted accounting principles (GAAP) basis accounting, the 1% is deferred revenue as a portion of each sale is recorded as loyalty points. This accounts for the portion of the money received.
If your restaurant uses tax basis accounting, you will not have any deferred revenue related to loyalty points. Companies would recognize 100% of the revenue from a sale and won't account for loyalty programs at all.
Gift cards
Deferred revenue most often occurs when restaurants sell gift cards. Deferred revenue for gift card and gift certificate purposes is often known as gift card liability.
Simply put, if a restaurant sold a gift card for $100, it hasn’t provided any good or service yet. The $100 would be recorded as deferred revenue since the restaurant has essentially collected the money upfront without providing a service or product.
Promotional gift cards
Restaurants will occasionally offer promotional discounts like “buy a $100 gift card and receive a free $25 promotional gift card.” This type of promotional gift card is treated like a coupon and the discount of the promotional dollar value is taken as a reduction in revenue when redeemed.
Any cost associated with these promotional cards needs to be expensed as it occurs. Once the promotional gift cards are issued, there is no liability recognized as no cash was received, so there is no amount to record in your general ledger.
For good internal controls in tracking, accounting and reconciling, you may use a separate gift card number sequence for promotional gift cards. The accounting entry would be to record the promotional gift cards as a liability with an offsetting contra liability for the same amount.
When the promotional gift cards are redeemed, revenue is recorded, and the promotional gift card liability is relieved along with the contra liability.
Unredeemed gift cards
Many of the gift cards restaurants sell will never be used. Unredeemed gift cards can be a complicated accounting and state tax compliance issue. To simplify the state tax compliance issues, you should consult with your restaurant accounting firm to help you record revenue and unclaimed property for unredeemed gift cards.
When it comes to recording breakage revenue for unredeemed promotional gift cards, since no cash was received upon sale there would be no breakage revenue to recognize.
For good internal controls, consider expiration dates for promotional gift cards. When those dates are met, the liability and contra liability are removed from the general ledger. If restaurants don’t include expiration dates, consult an accountant for guidance on when to remove the liability and contra liability amounts.
Restaurant bookkeeping for gift cards
Accounting methods play a big role in how restaurants account for gift cards. If your restaurant uses GAAP accrual accounting, you will defer the revenue in full at the time the gift card is purchased.
For tax reporting purposes, companies can defer recognition of gift card sales as income only for a certain period, and only for unredeemed cards. How long you can defer depends on federal and state unclaimed property tax laws.
Restaurant accounting and finance software can help you track when unredeemed gift cards need to be reported. Restaurant-specific software packages also help streamline the accounting process.
Expenses can't be deferred
Logic might dictate that when incurring costs related to deferred revenue, restaurants could have a deferred expense as well. Unfortunately, expenses can’t be deferred.
If an expense item that hasn't been paid for is incurred, record it as an accounts payable or accrued liability on the balance sheet liability side.
Once you enter it on the balance sheet as an accounts payable or accrued liability, the expense becomes a liability like deferred revenue.
Deferred revenue best practices
Having proper process controls to distinguish what money is coming in, what service was provided and what will be provided in the future is an essential accounting best practice, especially when you’re dealing with deferred revenue.
A restaurant's accounting process and control infrastructure should include who in the restaurant’s management hierarchy has access to the books, whether the restaurant has an events or catering department, and what those departments should be reporting to the accounting department.
For example, one best practice would be to create an internal form that lists the upfront amount collected, services provided and date of service to be delivered. Another best practice would be looping the accounting department in so they know what money cannot be recognized as revenue and is deferred revenue. Once the event occurs, notify accounting that they can now recognize the revenue. Any remaining balance owed would be collected at that time and recognized as revenue.
Why work with Baker Tilly
Don’t wait for tax season to get your books in order, maximize cash flow and set up best practices and internal controls for revenue recognition. The Baker Tilly restaurant team is experienced and knowledgeable in restaurant operations, tax and accounting.
