Most multi-unit restaurant groups run each of their locations as a separate legal entity. Each entity and store has its own P&Ls and balance sheets. If all entities are held under a holding company, the GAAP financial statements can be consolidated to see the true picture of the overall business.
The challenge for restaurant groups is that most accounting software is not set up to handle these multiple entities in a single database. This requires that your accounting team manually input due to/from entries individually for each restaurant location – a time-consuming and error-prone process.
What is intercompany accounting?
Intercompany accounting is the process of recording financial transactions between different legal entities within the same parent company. Since the entities are related, the transactions between them are not independent and companies cannot include a profit or loss from these transactions on consolidated financial statements.
What are intercompany eliminations?
Intercompany eliminations are used to remove non-arms-length transactions between related companies from consolidated financial statements. In restaurant intercompany accounting, the two most common types of intercompany eliminations are intercompany debt and intercompany revenue and expenses.
Intercompany debt. Eliminating any loans made from one entity to another within the group because these only result in offsetting notes payable and notes receivable, as well as offsetting interest expense and interest income. This issue most commonly arises when funds are being moved between entities from a centralized treasury department at the parent company.
Intercompany revenue and expenses. Eliminating the sale of goods or services from one entity to another entity within the group. Consequently, the related revenues, cost of goods sold, and profits are eliminated. The reason for these eliminations is that a company cannot recognize revenue from sales to itself; all sales must be made to external entities.
Executing intercompany accounting best practices
Managing intercompany transactions can be labor intensive and costly. Reconciling large volumes of data is often hampered by limited cross-entity visibility. Intercompany accounting is a critical process that a parent company must get right. If not done correctly, it can adversely affect the preparation of your company’s consolidated financial statements. The following best practices for intercompany accounting will make this process much more straightforward and hassle free.
1. Set Up Due To/From Accounts
Assume you have two locations, and each is owned by a different legal entity (Location A owned by LE1 and Location B owned by LE2). Let’s assume a vendor delivers $60 of goods to Location A and $40 of goods to Location B, but then sends one consolidated invoice for $100. If the invoice is entered at Location A, then that means that Location B should owe Location A for its $40 portion of the expense. On the invoice, Location A will be the location in the header and then there would be two detail rows, one for Location A for $60 and one for Location B for $40. The distribution without intercompany would be as shown below.
Total debits and credits must balance for each legal entity, so the example above is out of balance. Total debit for LE1 = $60 and total credit = $100, while total debit for LE2 = $40 and total credit = 0. LE2 needs a $40 credit and LE1 needs a $40 debit to balance out. That’s where the due to and due from entries come in. You must add intercompany rows to balance out the entry and show that LE2 owes LE1 $40 as shown below.
Now debits and credits match for each legal entity and the transaction is in balance. The due to and due from accounts were pulled from each respective legal entity.
There are two methods to choose from when setting up due to/from accounts on a legal entity. (Method 2 is a best practice.)
- Method 1. Use separate due to and due from accounts for each legal entity. This means in our example on LE1 we’d put an account named “Due from LE1” in the due from account field and “Due to LE1” in the due to account field.
- Pros: This method provides the most detail because each legal entity will have its own due from and due to accounts so they will show up separately on a balance sheet.
- Cons: Requires setting up more accounts in your GL, makes reports like the balance sheet longer because they must show each account. More importantly, the due from and due to account balances grow over time, and at some point, you should do an adjusting journal entry to cancel them out against each other. For example if Due to LE1 grows to a balance of $10,000 then that shows as an asset on LE1 balance sheet which looks good, but the if it also has a liability of Due from LE1 = $9,000 then the net difference is actually just an asset of $1,000 instead because the rest cancel each other out. Periodically you’ll want to do an adjustment to clear those amounts, so they don’t grow over time to an unmanageable amount.
- Method 2. Use the same account in both due to and due from account fields per each legal entity. This means in the example on LE1 you’d put one account named “Due To/From LE1” in both fields.
- Pros: This makes managing the balances simpler because since you use the same account for due to and due from, as they get debited and credited, they cancel each other out without requiring the user to do manual adjustments to the balance as described in the cons of method 1 above. This also creates half the number of intercompany accounts which is easier to set up and makes reports shorter.
- Cons: Slightly less visibility to see due to and due from balances separated out explicitly.
2. Implement a Continuous Closing Practice
The closing process is time consuming and cumbersome. So while a continuous close may seem counterintuitive to a period closing – either monthly or quarterly – many accounting teams are increasingly adopting this approach because it does offer advantages.
What is continuous close? It’s the practice of converting period-end closing tasks into day-to-day activities over an accounting period.
Matching and reconciling transactions that are a few weeks old are predictably more error prone than doing them on a continuous basis. Doing those tasks closer to the time of the transaction is not without challenges, including retraining accounting staff and updating processes, but the benefits may be worth it.
Additionally, by spreading hectic intercompany tasks such as reconciliation and elimination throughout an accounting period, your accounting team can avoid the workload surge when the period end comes.
3. Standardize Restaurant Accounting Procedures
One of the major accounting issues parent restaurant groups face is the variety of reporting practices used by each of the legal entities under it. If the parent company categorizes and tags its transactions in using one method and its individual restaurants do it another way, the result is an accounting nightmare for the accounting team. Errors in your financial statements are inevitable, requiring your accounting team to sort out these errors manually.
Consequently, it is critical that you create standardized practices and policies that detail every step of your accounting process, in addition to how to collect, tag, and store transactional information. This will allow your accounting teams to organize and file your financial reports much more efficiently, while significantly lowering the risk of error.
If your restaurant locations are spread out over various states and localities, it is not advisable to apply across-the-board uniform policies to every accounting process, as the differences among local laws would make such policies too vague. However, policies pertaining to intercompany reporting and management are much easier to enforce across the entire organization.
4. Use a Central Data Management Center for Bookkeeping and Accounting Data
Centralized document management is another essential aspect of intercompany accounting. In many cases, enterprises have their transaction documents, such as invoices, contracts, and purchase orders isolated within different systems, making reconciliation discrepancies difficult to fix. A central repository for all intercompany records can streamline your recordkeeping.
Using a central database for intercompany bookkeeping and accounting data not only saves time, but also minimizes the potential for errors. A centralized database automatically records the transfer of resources from location A to location B across the system, eliminating the need for both locations to record the transfer and hoping that they match. An accounting system with a central database allows you to upload a long database spreadsheet into the system in one click, versus typing out thousands of lines of transactions.
A centralized database also facilitates streamlined reporting. Modern restaurant accounting software with one database for multiple locations allows reporting of 100 restaurants to be completed in the same time as it would for one restaurant.
5. Use AP automation Across All Your Restaurants
Accounts payable is a critical business function in keeping the internal processes flowing smoothly and ensuring your food and beverage vendors are paid on time. Without the proper technology in place, inefficient AP processes can be a drain on your accounting resources. Using a restaurant-specific AP automation solution streamlines the accounts payable process, improving efficiencies no matter how many concepts or locations you operate.
AP automation virtually eliminates time-consuming, error-prone data entry and allows your store managers to focus on customer service and front of the house operations. Getting an invoice through your manual accounts payable system is an arduous process. A manual data entry mistake can result in hours of time spent tracking down the error’s cause and invoice errors can consume your restaurants’ profit margin. By virtually eliminating manual data entry and streamlining approval processes, AP automation can cut days off your monthly invoice processing time. Leveraging AP automation, enables your accounting team to upload invoices from multiple locations to the cloud, process them, and get them approved for payment.
Additionally, AP automation can help verify vendor contract pricing. Vendor errors that originate from supplier-submitted invoices can be more difficult to manage than internal mistakes. Automated AP empowers you to track price fluctuation, automating contract price verification to hold vendors accountable, without requiring verification between accounting staff and store-level managers. And with invoices organized in one central system, with accurate line-item details, you can set variance alerts to gain insight into real-time food costs. Armed with this information, the operations team can act quickly to fix these errors without waiting on the accounting team for details.
AP automation also impacts your big picture in the long term. Without clear visibility into your accounts payable, you may experience irregularities in accounting and reporting. AP automation includes an audit trail, showing you every step of human intervention in invoices company wide. With better visibility and control over financial data, you are better equipped to resolve potential problems.
Finally, if you plan on scaling your concepts or locations, the health of your business’ financial engine – including your accounts payable – is crucial. With AP automation, you can dramatically scale your invoice volume without increasing the size of your accounting team.
6. Streamline Your Account Reconciliation Process
For most accounting teams, reconciliation is the most dreaded part of the monthly financial close. Despite its time-consuming nature, it is often overlooked for process improvement that would make the close faster, easier, and more secure. Since reconciliations are often manual, involve multiple people, and can require thousands of reconciliations, the opportunity to reduce time and resource requirements can be significant.
Automation fully integrates account reconciliation into the financial close and supports monitoring, reporting and analysis. In addition to streamlining the process, an automated solution for reconciliation also improves security of your financial data.
7. Use an Integrated Accounting System for Restaurants
Many restaurants continue to manage their accounting and other back-end operations using antiquated, standalone generic software. In these tech stacks, accounting software is disconnected from the scheduling, inventory, and sales reporting software. Data is gathered separately and imported — or worse yet, entered manually — in a mundane, error-prone and time-consuming process.
Today’s next-generation, fully-integrated restaurant accounting solutions automates nearly all accounting-related functions and can dramatically reduce the day-to-day workload of your restaurant’s accounting team. A combined view of financial information reduces errors and improves data integrity. All financial information and reports, including the general ledger, budgets and forecasts, bank reconciliations, and accounts payable/receivable statements, are available from a dashboard. You can drill down into business performance of all your locations side by side using standardized templates or create your own customized dashboards.
Using an integrated restaurant management system, you can run reports for accounting, inventory, banking, daily sales, labor analytics, food costs, and recipes to identify potential problem areas and opportunities for improvement at each of your locations. Some of the more advanced systems also enable you to import sales mix data directly from your point-of-sale (POS) system, allowing you to compare costs to sales and then using those results to make informed menu decisions to increase sales of your higher margin items. You can also aggregate labor data from the POS system, allowing you to compare scheduled to actual numbers, get a payroll accrual journal entry, and compare daily P&Ls in relation to labor costs.
8. Integrate Your POS System with Restaurant Accounting
Seamlessly integrating your POS software with your accounting platform enables you to centralize key data collection about daily sales and labor across all of your locations. Eliminating manual POS data entry streamlines GL input and reduces errors. Automatically pulling POS data and creating sales and labor journal entries not only ensures accurate data, but it also saves time for your store managers and bookkeeping team.
In addition to the short-term efficiencies, POS integration can inform your business strategy over time through customized reporting and accessibility. When your accounting system pulls detailed data directly from your sales POS system, you can see a real-time, side-by-side representation of your financial situation across all your locations, allowing you to immediately address anomalies in your numbers.
Ensure your accounting software offers reconciliation and elimination capabilities
Matching transactions among entities within an enterprise can be challenging in intercompany accounting. Because internal transactions are normally processed and stored in various IT systems – multiple ERP, accounting software, inventory management software, etc. – your accounting system should offer automated intercompany reconciliation and elimination.
An advanced, restaurant-specific restaurant management software suite will offer reconciliation and elimination functions as an integral part of the software.
Intercompany accounting can pose challenges for multi-unit restaurant groups since each of their locations are set up as a separate legal entity. Most accounting software is not set up to handle these multiple entities in a single database, thus requiring the time-consuming and error-prone process of manually inputting due to/from entries individually for each restaurant location.
However, in a cloud-based, restaurant-specific accounting system, intercompany entries are automated, increasing accuracy and saving hours of weekly accounting time.
With Restaurant365, a cloud-based restaurant-specific accounting solution, intercompany transactions, including intercompany reconciliation and elimination are automated. Restaurant365 is a back office platform that incorporates accounting and operations into an all-in-one platform that is fully integrated with your POS system, food and beverage vendors, and bank. If you’d like to learn more about Restaurant365, request a free demo.