Rest assured, today’s post is not about tax evasion. But, it does have a very important implications. If your food recipes use any alcohol, it’s important to account for it properly.
Your food cost of sales should include all of the costs that are incurred in preparing the food menu items. Sometimes, restaurants forget to include the costs of liquor, wine and beer that are used in food dishes. Food costs are understated and alcohol costs are overstated. No big deal to the bottom-line, but it does affect the margins for each category, which are considered in your decision-making.
But there is a far more important reason. Any restaurant that sells alcoholic beverages is going to be faced with future sales tax audits. Tax auditors use indirect audit methods to project the sales that were likely to have been generated, based on the actual purchases of alcohol. The assumption is that all alcohol is purchased for resale, not for cooking. If you don’t keep records of alcohol used in cooking, the auditor will have no way of verifying this during an audit. Consequently, mark-ups will be applied to the cooking alcohol costs, and the projected sales figure will be higher than it should be. Your restaurant will appear to be under-reporting its sales, and sales taxes will be reassessed for this deficiency. These reassessments can be very significant. For more information about the effects of cooking alcohol in tax audits, read this and this.
Tracking Cooking Alcohol
There are two main sources of alcohol used in cooking. Some alcohol is purchased specifically for cooking use. Examples might include 1500ml bottles of wine for making stock and kirsch, marsala and liqueurs for sauce flavourings. These items can be identified from the purchase invoices. Each invoice should show the items that were purchased for cooking purposes.
The other source of cooking alcohol comes from the bar. Restaurants that serve wines by-the-glass will often have wine in open bottles that is not saleable. Usually, this wine will be transferred to the kitchen for use in making stock or sauces. Occassionally, small quantities of liquor may be taken from the bar stock to make various food sauces, too.
Restaurants should maintain a log showing the description and quantity of all alcohol transfers from the bar to the kitchen. Ideally, these should be dated and initialled by the chef and bar manager. For each reporting period, the cost of the transfers should be determined and a journal entry should be made to reallocate the costs from liquor, wine and beer to food costs. The log should be kept on file to support the kitchen use of alcohol during the period. This log will also be used to account for part of the alcohol variances for the period.
Keeping track of alcohol used in cooking will help prevent costly tax audit reassessments, help explain alcohol variances and provide more accurate food costs. This kind of “cooking the books” is a good thing!