Restaurant Bookkeeping and Accounting in Canada
- Targeted Accounting
- Bookkeeping
Table of Contents
The Daily Sales Entry for Restaurants
A restaurant generates hundreds of transactions a day. Importing them individually produces an unusable ledger; ignoring them produces an unauditable one.
The standard approach is a single daily journal entry from the POS Z-report capturing gross sales by category, sales tax collected, tips received, payment types, discounts and comps, and any cash over or short. That entry is then reconciled to the actual deposits and card settlements.
Two lines earn their place. Comps and discounts tracked separately reveal a cost most owners underestimate: free meals and staff discounts frequently run to several percent of sales. And cash over/short tracked daily is your only realistic internal control on cash handling; a consistent shortage pattern on particular shifts is information.
At a glance
- Controlled tips are pensionable and insurable and must run through payroll. Direct tips generally are not. The distinction decides your CPP and EI exposure.
- Record a daily sales summary from the POS, not individual transactions, and reconcile it to deposits.
- Prime cost, food plus labour, is the number that predicts survival. Target is commonly 60–65% of sales.
- Gift cards are a liability until redeemed, not revenue when sold.
- Some food is zero-rated and some is taxable, and the dividing line is specific enough to need checking rather than assuming.
Tips: Controlled versus Direct
This is the highest-risk area in restaurant payroll, and the rules turn on who controls the money.
Direct tips pass from the customer to the employee without the employer determining the amount or the distribution: cash left on a table, kept by the server. These are generally not subject to CPP or EI withholding by the employer. The employee is still required to report them as income.
Controlled tips are those the employer handles or determines: a mandatory service charge added to a bill, tips pooled and redistributed according to a house policy, or tips on card payments that the employer collects and pays out. These are pensionable and insurable employment income, must be run through small business payroll, and appear on the T4.
The exposure arises because most modern restaurants are majority card payment, and any house tip-out policy tends to make those tips controlled. A restaurant treating all tips as direct while operating a pooled distribution can face assessment for unremitted CPP and EI on both sides, across every open year. Our guide to tips and gratuities in Canada covers the payroll treatment, Ontario’s tip pooling rules and how to record tips in your books.
Worth a specific review
Tip arrangements vary enough between establishments that a general rule isn’t safe. Have your actual policy (how tips are collected, pooled, allocated and paid) reviewed against the current CRA position. This is one of the most frequently assessed issues in the industry.
Food Cost Percentage
Food cost percentage is cost of food sold divided by food sales. Most independents aim for the high twenties to mid thirties depending on concept, and most calculate it wrongly.
The error is using purchases instead of cost of food sold. Purchases tell you what you bought; they only equal what you used if inventory didn’t move. The correct calculation is opening inventory plus purchases minus closing inventory, which requires counting inventory, weekly for high-volume operations, monthly at minimum.
Without inventory counts, a bad month and a stocking-up month look identical, and the theoretical-to-actual variance that reveals waste, over-portioning and theft can’t be calculated at all. Restaurants that count weekly and investigate variance consistently outperform those that don’t, and the gap is usually several points of margin.
Labour Cost and Prime Cost
Labour cost includes wages, employer CPP and EI, workers’ compensation, vacation accrual and any benefits, not just the payroll run. Scheduled against forecast covers rather than habit, it is the most controllable cost in the operation.
Prime cost, food plus beverage plus total labour, is the metric the industry manages by, commonly targeted at 60 to 65% of sales. Above that, the remaining margin rarely covers rent, utilities and debt service. Tracked weekly rather than monthly, it is early enough to act on.
Liquor Licensing and Provincial Rules
Alcohol is regulated provincially, and the requirements differ meaningfully between Ontario, Manitoba and British Columbia: licensing, permitted purchase channels, record retention and inspection regimes all vary. The regulators are the AGCO in Ontario, the LGCA in Manitoba and the Liquor and Cannabis Regulation Branch in BC.
From a bookkeeping standpoint the essentials are consistent: track beverage cost separately from food, because the margins and the variance patterns are entirely different; retain purchase records in the form and for the period the provincial regulator requires, which may exceed the CRA’s six years; and reconcile pour cost with the same discipline as food cost, since beverage shrinkage is both easier and more valuable to steal.
Gift Cards and Deferred Revenue
Selling a gift card is not a sale. You’ve received cash and incurred an obligation to provide food later. It belongs in a deferred revenue liability account, moving to revenue only on redemption, with sales tax applying at redemption rather than at sale. The balance sheet mechanics are covered in small business accounting basics.
Restaurants that book gift card sales as revenue overstate a strong December and then serve the meals in January against no recorded revenue at all. Track the outstanding balance as a real liability, and check the provincial rules on expiry, since consumer protection legislation in most provinces (Ontario’s Consumer Protection Act among them) restricts or prohibits expiry dates on gift cards.
GST/HST on Restaurant Sales
Food service is one of the more nuanced areas of GST/HST. Restaurant meals are taxable. Basic groceries are zero-rated. Registration, rates and filing are covered in our GST/HST guide for small business. Between them sit rules that turn on preparation, packaging and quantity, where a takeaway item, a bakery order above a certain count, or a beverage in a particular size can fall on either side of the line.
If you sell any mix of prepared food, packaged goods, catering and retail items, your POS tax mapping needs to be set up deliberately and reviewed when the menu changes. Errors here are systematic rather than occasional, which means they compound across every transaction until found.
Restaurant Payroll
Restaurant payroll is harder than the headcount suggests, because almost everything varies: hours, rates, roles within a single shift, and a workforce with high turnover.
Overtime and averaging. Employment standards set the threshold at which overtime applies, and it differs by province. Some provinces permit averaging agreements over multiple weeks, which suits a business with uneven weekly demand, but these require specific agreements and sometimes approval, and cannot be applied informally.
Statutory holiday pay. Every province calculates it differently, most using a formula based on earnings over a preceding period rather than a standard day’s pay. Getting it wrong is among the most common employment standards complaints in the industry, and the calculation cannot be carried between provinces.
Split shifts, call-in and reporting pay. Most provinces require minimum pay when an employee reports for a shift that is then cut short, and several regulate split shifts. These are easy to breach with last-minute scheduling changes driven by a slow night.
Turnover and ROEs. A restaurant issues more Records of Employment than almost any other small business. Building ROE generation into the departure process, rather than treating each as an exception, is the only way to stay current, and the insurable hours reported must reconcile to your payroll records.
Scheduling as a financial control
Labour is the cost most responsive to management attention, and the lever is the schedule rather than the wage rate. Scheduling against forecast covers (built from the same period last year, adjusted for known factors) rather than against habit typically recovers several points of labour cost within a couple of months.
Review labour as a percentage of sales by daypart, not just by week. A restaurant with acceptable overall labour cost frequently has one heavily overstaffed service period subsidised by the rest. That pattern is invisible in a weekly total and obvious in a daypart breakdown.
Integrating the POS with scheduling and payroll removes the re-keying that produces errors and, more usefully, makes labour cost visible during the week while it can still be changed. A restaurant that learns its labour percentage three weeks after month end has learned history. Integration quality is one of the tests in our guide to choosing accounting software.
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