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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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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Do You Have a Sales Tax Expense?

On this blog, I mainly talk about controlling costs in restaurants.  When we look at sales taxes that restaurants pay, we rarely consider them to be ”costs”.  Sales taxes are considered “trust” taxes.  Restaurants, retailers and other businesses that charge sales taxes are really collecting them on behalf of the government.  This means that sales taxes are not revenues and the remittance of sales taxes is not an expense.

So, it should be obvious that restaurants don’t have sales tax expenses.  However, many restaurants do have sales tax expenses!  I’m going to tell you how.

In a perfectly honest, trustworthy world, restaurants would collect the proper amount of sales tax from customers and remit it to the tax authorities on time.  Unfortunately, we don’t live in a perfect (or an honest) world.  Some restaurateurs use tax receipts to fund their operations (usually out of necessity).  Others fail to report all of their legitimate sales and the sales taxes collected on those sales.  It’s called skimming and it has been around for at least as long as we have had sales taxes.  Most tax authorities estimate that about 50% of all restaurant operators “cheat” on their tax commitments.

If you don’t pay your taxes on time, you will be penalized and charged interest.  The penalty and interest becomes an expense of the restaurant.  But that’s not all.  If the government finds that your restaurant has not remitted all the taxes that it collected from customers, it will be reassessed for the tax, together with penalties and interest.  The difference in this case is that the restaurant may not have actually collected any sales tax from a customer!  Huh?  How can that be?

To understand this very common situation, you need to understand how tax auditors verify whether restaurants have reported all of their sales and sales taxes.  First of all, tax authorities “know” restaurateurs cheat on their taxes.  They also know that restaurants generate cash sales which can be skimmed from the till.  The tax auditor only needs to estimate the likely amount of sales and taxes that were skimmed from the restaurant’s sales, in order to issue a reassessment for the unreported tax, penalties and interest. 

It all goes wrong for the restaurateur, if the auditor estimates higher sales and sales taxes than the restaurant actually generated from customers.  Unfortunately, this is a very common occurrence.  Unless the restaurant can prove that the auditor’s estimate is wrong, the assessment will stand and the phantom taxes will have to be paid (plus penalties and interest).  This can be a very significant cost to a restaurant – even ones that are run by completely honest restaurateurs.

Try to disprove the tax auditor’s estimate is a very difficult task, especially when you try to do so after the fact.  There are effective ways to minimize the possibility of these unfair tax assessments, but it requires the restaurateur to be proactive and gather ongoing evidence to support the restaurant’s margins at all times.   If you need any further incentive to get on top of your restaurant’s margins, this is it.

To learn more about government tax audit tactics and how to “audit proof” your business, visit my sister blog for a comprehensive source of information crucial to your bottom-line and maybe even your survival.  While this information is written from a Canadian perspective, identical audit approaches are employed in the U.S. and many other international jurisdictions.  If you have any questions, please leave a comment or send me an email.  All enquiries are held in the strictest of confidence.

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How the HST Will Affect Your Prices & Margins

Recently, the Canadian Restaurant and Foodservices Association (CRFA) published three calculators to help restaurateurs determine the effect of the new HST, effective July 1, 2010, on their prices.  The calculators cover wine, spirits and beer.  I’ve included the links, below.  Perhaps a short note is necessary to help you use them properly.  They are set up for “typical” value, medium and premium priced examples.  Unfortunately, you aren’t able to change the net cost figures, but they will give you an idea as to the effects on your prices and the price that your customers will be paying come July. 

In order to use the calculators, you need to change the Licensee Margin figures for the Current and New price regimes.  When I looked at the calculator for wine, I found that it used a 246% margin for the medium wine.  In other words, a wine costing $14.85 would be sold for $51.38.  Not very likely.  If you sell your wine for 2.5 times cost, use 150% as your margin percentage (250% – 100% cost = 150%).  Under the New column, the calculator does not always use the same margin as under the Current column.  I doubt very many restaurants are planning on reducing their margins in July, so I would use the same margin before and after the HST changeover.

Here’s the good news:  The current 10% RST sales tax on alcohol sold in a restaurant is effectively being reduced by 2% when the combined HST rate on alcohol becomes 13%.

When we’re dealing with a government, when there’s good news, undoubtedly there is some bad news too.  In order to make up for the shortfall in liquor taxes, the LCBO will be raising prices.  Based on these calculators, it appears that wine prices will be rising 3.5% – 4.5%, spirits about 4.2%, and beer 3.7% – 5.5%.  Even though consumers will get a 2% break on sales taxes, the effect of restaurant markups on the increased purchase costs will ensure that most consumers will be paying more after June, 2010.

Based on these figures, beer prices shouldn’t rise more than about $0.10 per bottle.  Martini prices will probably increase about $0.50 and typical bar shots and cocktails about $0.25.  Low end wines will probably increase about $1.50 per bottle, and high-end wines about $6.00. 

Even though these cost changes are relatively small, the effect of volume means that you will need to adjust your selling prices for all alcoholic menu items on July 1, 2010.    Here are the calculators.  If you have any problems using them, ask your questions in a comment to this post or email me directly at bartaxca@gmail.com.

Wine Calculator

Spirits Calculator

Beer Calculator

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