QuickBooks Accounting for Groupon

I’m almost finished with Groupon articles!  I’ve got two more, then, I think we’re done.  I’ve been writing these articles, because there is a lot of confusion surrounding the accounting for Groupon certificates and how to enter them in QuickBooks.  The resources for learning about these areas are poor (and often contradictory), but that’s nothing compared with the confusing, and often downright incorrect, information that has been written about the tax implications of using Groupon!  I hope these articles will help accountants, bookkeepers and restaurant owners set up their books and account for these transactions properly.

Today’s article explains how to account for a restaurant’s Groupon transactions in QuickBooks.  Previous articles have covered the POS system set up for Groupon transactions, accounting for Groupon transactions (in general), and the very important tax implications of using Groupon in a restaurant.

As we know, from the accounting article, there are three types of Groupon transactions that need to be entered into QuickBooks:

• Initial setup and distribution of the Groupon certificates
• Daily redemptions of certificates
• Expiry of unused certificates

New Accounts

Before we get started with the entries, you’ll need to set up three new accounts.  An expense account (Promotional Expense – Groupon) to report the cost of the Groupon certificate promotion.  Alternatively, this may be set up as a sales discount.  We’ll also need a current liability account to keep track of the liability the restaurant owes for outstanding gift certificates (Liability for Groupon Coupons).  Finally, we need a current asset account (Deferred Promotional Expenses) to keep track of the discounts that will be recorded when the certificates are redeemed.

Initial Setup

The easiest way to record the issuance of certificates is with a journal entry.  In this example, 100 certificates were issued with a face value of $100 each.  The customer paid $55 to Groupon (to get a $45 discount at the restaurant).  Groupon takes 50% of the $55/certificate, and charges HST on their fee.  Groupon cuts a cheque to the restaurant for the remaining proceeds from the sale of the certificates.  Here’s the entry to set everything up:

 

If you don’t understand the accounting entry, please refer to the article about how to account for Groupon.  This entry sets up the liability for Groupon certificates, the deferred promotional expense (or deferred sales discounts, if you like), the promotional expense (Groupon fee), records the HST (sales tax) on the Groupon fee, and deposits the cheque from Groupon.  One simple entry does it all!

 

Redemptions

I hope you’re already using a sales receipt for entering the daily restaurant sales.  While you could use a journal entry, I find the sales receipt method to be the easiest, and most logical, way to enter daily sales summaries.  Here’s a sample redemption:

 

You need to create three new items.  The GrouponDiscount (discount type) item posts to the Promotional Expense – Groupon account.  In this example, it is the difference between the face value and the promotional value (paid to Groupon by the customer) – $100 less $55 equals $45.  In Canada (and California), this discount is coded as taxable (the “H” code), so that the discount amount will be deducted from the other taxable items before calculating the tax.

The GrouponDeferred item is an other charge item that posts to the Deferred Promotional Expenses account.  As each certificate is redeemed, a portion of the deferred expense is transferred to the actual expense account.  Note that this line is coded as exempt from tax (“E”).

Finally, a GrouponPayment item is used to post to the Liability for Groupon Coupons account.  This line entry reduces the liability for outstanding certificates by the face amount of each certificate redeemed.  Note that this, too, is not taxable (it’s like cash).  Note also, the net of the GrouponPayment and the GrouponDeferred items is equal to the amount that the customer paid for the certificate.

In Canada there is a 13% HST tax on the promotional value of the certificate.  In this case, the promotional value is $55.  Here, I’m assuming the customer paid the tax with cash (which could be posted to the account of your liking).

 

Expiry Entry

Many Groupon certificates expire after a certain date.  In our example, I’m assuming that was six months after the date of issue.  At that point, the restaurant ceases to have any liability to the certificate holders (though Groupon may refund a portion).  Let’s assume that 10 certificates were never used.  We need an entry to clean up the accounts.  The easiest way to do this is to make a journal entry, as follows:

At the expiry date, the liability for outstanding certificates is $1,000.  The balance in the Deferred Promotional Expense account is $450.  We have to eliminate the balances in these two accounts.  The balancing item in the journal entry is to the Promotional Expense – Groupon account.  Note that it is a credit to an expense account, which represents a recovery of the promotional expense related to this batch of Groupon certificates.

The elimination of the Deferred Promotional Expenses represents the $45 portion of each certificate, and the recovery of promotional expenses represents the $55 portion.    Neither of these amounts will have to be “paid” by the restaurant with food and drink.

 

That’s all there is to it.  My final article on Groupon will examine whether it is a worthwhile promotion for restaurants, and if so, under which conditions.

 

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Groupon POS Implications

This is the second article in a series about Groupon coupons for restaurants.  The first article covered accounting for Groupon transactions.  This piece covers how to set up your Point of Sale (POS) system to record redemptions of coupons.  Failing to do so properly could result in the restaurant being on the hook for a lot of sales tax, penalties and interest!

In the first article, we learned that HST applies to the “promotional value” of the Groupon coupon.  In our example, the coupon was worth $100 of meals, and the customer purchased it for $50, which was paid directly to Groupon.  The promotional value of the coupon is the $50, even though the restaurant does not receive this amount from Groupon.  So, when the customer orders $100 worth of meals and drinks at a restaurant, she will have to pay tax on $50, but she will receive a credit for $100 (face value of the coupon).

Restaurants that use Groupon (or other similar programs) may need to update their POS systems to properly account for these transactions.  Many POS systems can be easily modified by the user to make these changes, but some require programming by the developer (which can take time).  Here are the changes you will need.

Groupon Discount

In our example, we will need a discount key to deduct $50 from the customer’s bill, before tax.  This reduces the bill from $100 to $50.  Note that this reduces the customer’s bill to the amount that he or she paid for the coupon.  Now, the POS system will calculate sales tax(es) in the usual manner.  In Ontario’s case, the POS system will add $6.50 (13% HST) to the bill, leaving a balance of $56.50.  You may need to have another key that allows a dollar amount discount, determined at the time of sale, too.  This is because some customers won’t spend the full amount they are entitled to on the coupon.  For example, if a customer spent only $80 and redeemed the coupon, the discount to be applied would only be $30.

Groupon Coupon Payment

Now, we need to account for the other $50 that the coupon holder is owed.  The easiest way to do this is to create a Groupon (or Coupon) payment type.  Again, this may require programming, but many systems allow to you easily create this within the software.  Using a payment type, the customer’s bill will reflect a $50 reduction of the balance due.  Note that there is no tax reduction, just like there is no tax reduction when restaurants receive cash, Visa, MC, etc…

POS Reporting

You may need to update your day end summary reports to ensure that they pick up these new types of transactions (discount and payment type).  Also, you should make sure that you have the ability to create a report that shows Groupon discounts apart from other discounts.

It is useful to have the ability to print a report showing all Groupon redemptions (payment type), so that you can check it to the certificates that were initially issued.

Other Controls

The POS system only gets you part of the way to controlling and properly reporting your Groupon transactions.   You will also need to adjust your internal controls.  Specifically, you will need to create a policy about expired coupons.  Many restaurants simply refuse to accept any coupons that have expired.  In the case of Groupon coupons that is probably the best policy, because there is very little chance that these customers will ever return without a coupon.  Many restaurants will honour coupons and certificates that they have given to VIP customers or those that received the certificates at charity auctions, because these truly are good customers or potentially good customers.

Servers need to check for expired Groupon coupons every time they are redeemed.  You need to ensure that duplicated coupons are not accepted.  Servers need to be properly trained on how to enter discounts and Groupon payment types.

As we will see in a forthcoming article about tax implications of Groupon certificates, it is imperative that the restaurant keep all guest checks paid with Groupon certificates.

You need to make sure that your Groupon transactions are recorded in the accounts accurately, based on the concepts outlined in the first article.  I’ll be showing you how to do this in QuickBooks in a future article, too.

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Accounting for Groupon Coupons

While I’m not a fan of Groupon coupons, at least for restaurants, I felt compelled to write a few articles about it.  Today’s piece covers accounting for Groupon coupons, because I’ve seen some really weird accounting recommendations and far-from-best-practices.  As far as I know, none of the more unusual accounting has been suggested by real accountants!

Future articles will cover how to generate the proper entries in QuickBooks, how to set up your Point of Sale (POS) system to properly account for redemptions of Groupon certificates, and why you may be in for a huge shock when the tax man comes a knocking.

For what it’s worth, if you really, really think you need to use Groupon (or Living Social) coupons at your restaurant, at least get the accounting right.  There are four types of entries that need to be made in your accounting system, which are:

1. Setting up the initial distribution of Groupon certificates,
2. Paying Groupon its fee or commission for selling the coupons,
3. Recording the redemptions of coupons by customers, and
4. Accounting for any remaining coupons that expire.

I’m going to take you through these transactions, using an example.  Here are the facts:

• RestaurantCo offers 100 Groupon certificates that provide $100 worth of meals/drinks for $50.
• Groupon charges RestaurantCo 25% of the face value, or $25 per certificate for marketing and administration
• Only 90% of the certificates are actually redeemed at RestaurantCo prior to the expiry date
• Groupon and RestaurantCo are registered for HST

Initial Distribution and Setup

RestaurantCo has promised to accept $10,000 worth of Groupon certificates.  This represents a liability owing to coupon holders.  Therefore, it needs to be set up as a current liability on the books of RestaurantCo.  Note that most of the recommendations by others on the internet and on Intuit’s communities (at least in the U.S.) fail to record the liability.  Instead, they show this as a sale!

Unfortunately, RestaurantCo doesn’t receive $10,000 for the coupons that are issued.  In fact, it receives $10,000, less the discount offered to customers ($100 – $50) x 100 certificates, or $5,000, less the commission paid to Groupon of $2,500 (plus HST of $325).  So, RestaurantCo receives a cheque for $2,175.

This is where it gets complicated (which is a code word for “interesting” to an accountant).  We do have to consider the tax implications of certificates that are redeemed.  In Canada, the Groupon certificates are considered to be gift certificates, for the purpose of determining whether GST/HST applies to any transactions.  The sale of gift certificates by RestaurantCo (and by Groupon) is not considered a taxable “supply” (or sale).  Therefore, there is no HST charged on the sale of the certificates.

However, when the certificates are redeemed by the customers, RestaurantCo is deemed to have received $50 (price paid by the customer to Groupon) for the $100 of meals received.  So, we have to keep track of the amount paid by the customers (to Groupon) for the certificates and we have to keep track of the face value of the certificates, because that is the value of meals that RestaurantCo owes to coupon holders.

Note that Groupon’s fee to RestaurantCo is a taxable sale!  Therefore, the journal entry to record the initial distribution of Groupon certificates is:

Note that Groupon’s fee is set up as a promotional expense and that $325 of HST has been paid on that amount.  The $5,000 Deferred Promotion Expense is the difference between the $10,000 face value of the coupons and the $5,000 paid by the customers, which will be taxable to RestaurantCo when the certificates are redeemed.  So far, there is no taxable sale by RestaurantCo, but because the Groupon fee is not refundable, it is expensed when the coupons are issued.  We could defer this item and expense it as the coupons are redeemed, but most coupons are redeemed in the same year as they are issued, so this method is simpler.

The above entry records steps 1 and 2 of the Groupon promotion.

Coupon Redemptions

When customers come into RestaurantCo and redeem their coupons for meals, we need to record these transactions in the accounts.  Each coupon redeemed will reduce the liability for outstanding gift certificates, by $100, and we need to recognize $50 of promotion (or discount) expense that we deferred during the initial setup.  Under Canadian law, we need to charge the customer HST on the net value of the meals sold.  In our case, the net sales value is equal to the amount paid by the customer for the Groupon coupon – $50.

Recall that only 90% of the coupons are redeemed, in our case.  The following journal entry records the redemption of 90 gift certificates, assuming the customers only purchased $100 worth of meals, each.

Note that RestaurantCo records $9,000 of revenue, which was paid for using 90 certificates.  HST is charged on $4,500, not $9,000, because that is the amount paid by the customers to Groupon.  RestaurantCo must charge and collect this amount from the customers.  The liability for certificates outstanding is reduced by $9,000, leaving a remaining balance of $1,000, made up of 10 unredeemed certificates.  Similarly, the deferred promotion expense is reduced by 90 x $50, or $4,500, leaving a balance of $500.  The reduction in deferred promotion expense is matched with an increase in the promotion expense.

I’ll cover this in more detail in a future article, but make sure you understand the calculation of HST on these types of transactions.  Note that HST is not charged on the regular menu prices of the items ordered.  Even though full menu prices are used to record the restaurant’s sales, tax is only charged on the amount net of the customer’s discount.  If you make the mistake and charge tax on the full menu prices (and treat the coupon’s face value like money), you will have over-charged your customer and you will be required to remit all of the amount collected to the CRA.  In other words, you don’t get to keep the over-charged tax!

At Expiry

Coupons don’t last forever.  RestaurantCo wants people to come in and try the restaurant as soon as possible.  So, the coupons issued are given a fairly short expiry date, after which they are worthless.  Given that RestaurantCo still has some certificates outstanding at the expiry date, we need to make a final journal entry to clear up the accounts.  We need to eliminate the remaining liability for certificates, because RestaurantCo no longer owes this amount to coupon holders.  We also need to deal with the remaining deferred promotion expense.  We need to record the following entry:

At this point, we have eliminated both the liability for certificates and the deferred promotion expense.  The credit to promotion expense is actually a recovery of promotion expense related to the Groupon promotion, because RestaurantCo saved $50 on each certificate that expired.

Seek Professional Advice

The example in this article was based on Canadian tax laws.  Other jurisdictions may have different policies regarding the sales and income tax treatment of Groupon style coupons.  If you are considering using Groupon or any other similar promotion, please seek the advice of a qualified tax professional, to make sure you are collecting and remitting the proper amount of tax on your sales.

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Are All Thefts Equal?

Today’s post asks, are all thefts equal?  I’ve listed four common forms of theft in restaurants and bars.  If the amount of theft is equal in each case, is the cost to the restaurateur the same?  If you think each one has the same impact on the restaurant or bar, read on.

Types of Theft

1. Employee takes or consumes food, supplies or assets without paying.

2. Employee takes or consumes alcohol without paying.

3. Bartender over-pours drinks (and under-pours others to maintain the proper cost of sales).

4. Bartender consistently over-pours or gives away free drinks.

Employee takes or consumes food, supplies or assets without paying

In this type of theft, the restaurant loses the cost of the items taken.  Pretty straight forward.

Employee takes or consumes alcohol without paying

You may think that this form of theft has the same cost as an employee taking food or supplies.  However, the cost can be quite a bit higher than you think!  Yes, you’ve lost the cost of the alcohol consumed, but you will also incur a substantial tax liability directly related to the theft.

To understand why, refer to my paper, The True Cost of Staff Theft.  The average tax cost (including penalties and interest) will be approximately equal to the cost of the alcohol taken.  It can be even more than this, depending on whether the tax authorities charge a benefit to the shareholders.

Essentially, this form of theft costs the owner at least two times the cost of the alcohol taken.

Bartender over-pours drinks (and under-pours others to maintain the proper cost of sales)

At first blush, this theft doesn’t appear to cost the restaurant at all.  While there are no sales or income tax consequences and there are no net inventory losses, the restaurant will still incur significant losses over time.

Those customers who receive under-pours may decide to take their business elsewhere, resulting in a significant, longer term loss of revenue to the restaurant.  Even though it is an indirect loss, it still costs the owner.

Alternatively, the under-poured customers will notice that some customers are receiving larger pours and demand them too.  You keep the customer, but now most customers are receiving larger pours.  The over-pouring can no longer be masked by under-pouring, resulting in a direct inventory loss as well as the related tax consequences.

Bartender consistently over-pours or gives away free drinks

Similar to the last case, this one involves the direct cost of alcohol given away in full drinks and by systematic over-pouring.  In an audit, sales and income taxes will be calculated based on the sales that would have been reported, had the missing alcohol been sold to customers.  Note that when customers are given free drinks or heavy pours, they will be ordering fewer paid drinks.  The cost to the restaurant is the full selling price of the drink that wasn’t “sold”.

With this form of theft, (a) you don’t have the cash from the missing sales, (b) you have a loss equal to the cost of the missing alcohol, and (c) you have a substantial tax liability.

The Bottom Line

You cannot afford to let theft go unchecked in your restaurant or bar.  If you think you are only losing the cost of the missing alcohol, you’re probably not devoting nearly enough time and effort to combat theft.  Failure to heed this advice could put you out of business.

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Cooking the Books

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.

Proper Accounting

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.

Bottom-line

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!

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