Restaurant Profit and Loss Statement: Food, Labor, Prime Cost

What should a restaurant profit and loss statement show?

A restaurant P&L matches each month's sales with the food and labor that produced them. Food cost is what left the shelves that month. Labor is the work done that month. Purchase dates and pay dates do not decide the month.

A case is not simple when the shelves are never counted at month-end, payroll is booked by pay date, payroll hours do not match the schedule, tips sit inside sales, or the owner works without a paycheck. It also stops being simple when someone else will check the numbers: a buyer, a seller or a lender.

Gather before closing a month: the month-end count sheets, supplier invoices, the payroll register and time records, and the POS reports.

Why do food and labor costs swing from month to month?

Costs swing because deliveries and paychecks follow their own calendar, not the meals served.

• Deliveries land unevenly. A large order in the last week raises that month's purchases without raising its sales.
• Pay dates do not match months. A payroll paid every two weeks has 26 paydays in most years, so two months carry three. A pay period that straddles month-end pays part of one month's work in the next month.
• Cash-basis recording passes both swings straight through. Costs recorded when paid move with the calendar.

Counting the shelves and recording unpaid wages take out the timing swing. A swing that remains is worth explaining: waste, over-portioning, unrecorded comps or staff meals, supplier price changes, menu mix, or errors and missing records.

Is it common practice to adjust cost of goods sold and labor to when they were really used?

Accrual accounting does exactly that. It records a cost in the period it is incurred, so costs match the sales they helped earn (Publication 334). Cash-basis books record most costs when paid.

For food, the adjustment is the inventory count: a business that keeps a book inventory must take a physical inventory at reasonable intervals and adjust the book amount to agree with it (Publication 538). For labor, the adjustment is the payroll accrual. Whether the tax return follows the same timing is a separate question, covered below.

How do I find the food cost actually used in the month?

Food cost is opening inventory plus purchases, less closing inventory. The IRS uses the same arithmetic for cost of goods sold: beginning inventory plus purchases and other costs, less ending inventory (Publication 334).

1. Count at the close of the last day. Count the dry store, walk-in, freezer and bar. Record quantity, unit cost and value on a count sheet, with who counted and who priced it, as the IRS suggests for inventory forms (Publication 334).
2. Set the opening figure. It should equal last month's closing count. Explain any difference.
3. Add purchases. Use supplier invoices for goods received in the month, paid or not, less credits and returns. Take out food the owner removes for personal or family use. A sole proprietor charges it to owner draws (Publication 334); for a partnership or corporation, how it is recorded depends on the entity, so ask the preparer.
4. Subtract the closing count. The result is the food used.

The result includes everything that left the shelves, whether sold, spoiled, comped or eaten by staff. Without a count, food cost drifts toward purchases. Keep food and beverage on separate lines if the restaurant sells both. Napkins, chemicals and other supplies are a different question; see inventory or supplies.

How do I put labor in the month it was worked?

Take labor from the hours worked in the month, then add what the employer owes on those wages.

1. Start from the payroll register and time records. If a pay period straddles month-end, split the gross pay by the days or hours worked in each month.
2. Record unpaid wages at month-end. Book wages earned but not yet paid as a liability and clear it on payday, so the cost is not counted twice. Year-end timing and the return are in accrued payroll at year end.
3. Add the employer's payroll taxes. The employer pays Social Security at 6.2% (up to the annual wage base) and Medicare at 1.45% on covered wages, plus federal and state unemployment taxes (Publication 15). Deposits follow payday, but the cost belongs with the work.
4. Add the employer's tax on tips. Employee tips are the customers' money passed to staff, not a restaurant wage expense. The employer's Social Security, Medicare and applicable unemployment taxes on them are labor costs, subject to their wage bases. For the monthly P&L, accrue them in the month the tips were earned, like other payroll taxes. A mandatory service charge paid to staff is wages, not a tip (IRS tip rules). Reporting dates, the Form 8846 tip credit and large-restaurant rules are in card tips.

Which labor goes in: staff wages, payroll taxes, owner pay?

Staff wages and the employer's cost of employing them go in labor. Owner pay depends on how the business is organized, and it belongs on its own line.

Showing owner pay on its own line lets months and years compare on the same basis, whatever the entity type. For draws, see owner's draws; for partners, guaranteed payments and draws.

Cash paid to someone who works shifts is still labor. Whether that person is an employee or a contractor is a separate classification question (contractors who may be employees).

What is prime cost, and what goes into it?

Prime cost is food and beverage cost plus labor for the same month. Divide it by the month's sales to see it as a share of sales.

Prime cost is a management measure, not a line on a tax form. Whether a given share is right depends on the concept, menu pricing and service model. Compare month to month on one fixed definition.

Book each payroll dollar once. If kitchen payroll sits in cost of sales and again in labor, prime cost counts it twice. Which tax-return line holds kitchen payroll is a separate question for the preparer: Publication 334 says labor is usually part of cost of goods sold only in a manufacturing or mining business (Publication 334).

Can my monthly P&L be accrual while my tax return is cash?

Sometimes. Taxable income is computed under the method the business regularly uses in keeping its books (26 U.S.C. 446(a)). The IRS says a business must use the same method to figure taxable income and to keep its books (Publication 334). The regulations also list a reconciliation of any differences between the books and the return as an example of the records that support them (26 CFR 1.446-1(a)(4)). IRS guidance says a taxpayer meets the books-to-return rule if it reconciles the two methods and keeps records that support the reconciliation (Rev. Proc. 2015-13, section 2.01(4)).

Two setups look alike and are not:

• Cash-basis books with month-end adjustments for the monthly P&L: the inventory count and the payroll accrual are added on top, and the differences are reconciled.
• Accrual books and a cash return: the two methods differ, so a reconciliation between them is needed. Whether a given restaurant may do this depends on its entity type and size.

Which one a restaurant has depends on how its books and return are actually kept. Changing the method on the return needs IRS approval (Publication 538).

A restaurant that keeps a food inventory also meets an added rule that can require accrual for purchases and sales. That rule and its small-business exception are in inventory or supplies. For the full treatment, see accrual books and a cash-basis tax return and cash or accrual.

Why does payroll imply fewer labor hours than the schedule?

The schedule shows planned hours. Payroll shows pay for a period, so dividing payroll dollars by a wage rate gives implied hours that can fall short of the schedule for several ordinary reasons.

For employees covered by the federal minimum wage or overtime rules, the employer must record hours worked each workday and the total each workweek (29 CFR 516.2(a)(7)). For employees on fixed schedules, the records may show the schedule, confirm the hours were worked, and list exact hours in weeks that differ (29 CFR 516.2(c)). Compare three records: the schedule, the time records and the payroll register.

When a gap remains after timing, salaried pay and tipped-staff wages are matched, a buyer or lender will ask about it. If the cause is pay outside payroll, payroll tax and wage-law questions follow, and the books need professional review before anyone relies on the labor line. A responsible person who willfully fails to collect and pay over payroll tax can owe the unpaid employee tax personally (26 U.S.C. 6672); the IRS generally has 3 years to assess it, counted from the later of the filing date or the next April 15, with no limit for an unfiled return. See behind on payroll taxes.

What should a buyer or lender check on a restaurant P&L?

A buyer or lender should check that each cost ties to a record from the month it belongs to: counts, invoices, payroll and time records.

For a full purchase review, see checking a seller's books before you buy. For a lender's request, see proving income to a lender.

Example

These examples are illustrative; figures are in US dollars.

Food cost for March

A bistro starts March with $5,000 of food on the shelves, buys $30,000 and counts $13,000 at month-end. March food cost is $5,000 + $30,000 − $13,000 = $22,000, not the $30,000 of purchases. The extra $8,000 of food bought is still on the shelves for April.

Payroll for the last week of March

Payroll for the last week of March is $6,000 and is paid April 5. On March 31 the books show $6,000 of wages payable, plus the employer's payroll tax on it. The March P&L carries the cost. On April 5 the payment clears the payable, and the April P&L records no expense for that week.

A month's statement and its prime cost

Assume the sales tax is imposed on customers and collected for the state.

Owner pay goes on its own line after this profit. Whether 56 percent is right depends on the restaurant's concept and pricing.

Different for you?

• You are buying or selling a restaurant, or a lender asked for the P&L: the numbers will be checked against records. Start with checking a seller's books and add-backs. Month-end counts and payroll cut-offs that were never recorded are bookkeeping work to finish before the review.
• Months are not closed, food or labor still swings after counts and accruals, or the books are behind: see catching up on overdue books and bookkeeping help.
• Payroll does not match the schedule, or shift workers are paid in cash: see contractors who may be employees, and behind on payroll taxes if deposits were missed. Payroll records that do not tie out are a bookkeeping job.
• Your books are accrual and your return is cash, or you are unsure which is the book of record: read accrual books and a cash-basis tax return.
• An owner is on payroll in an S corporation or paid through a partnership: see S corporation owner salary and guaranteed payments and draws.
• Tips and POS sales do not tie to the bank: see daily POS sales and card tips.