Accounting Treatment for Restaurant Spoilage
If you run a business that deals in perishable goods, then spoilage is a fact of life. Items like produce and dairy products have a limited shelf life, and no matter how careful you are about purchasing, sometimes they go bad before you can use them. Just tossing them in the trash isn’t the end of the process, though. Once you dispose of expired or spoiled products, you have to account for this loss in your books using an appropriate treatment.
It’s possible for perishable items to arrive at your door in less than pristine condition. Sometimes packaging can be damaged in transit, which can lead to a shortened shelf life and a higher risk of spoilage. In those cases, the best way to handle this is to simply refuse delivery of goods that don’t meet your quality requirements. Your vendor should be able to issue you a credit on your statement for whatever portion of your order you refused. From an accounting standpoint, those items simply don’t become a part of your inventory and therefore you won’t have to expense them out when they spoil. If you begin to notice a pattern of credits from a particular vendor, it could be a sign that you may want to look for a new supplier.
Assuming that the products you’ve received are in good condition, they’ll become part of your inventory and be recorded in your books. At this point, the only way you can remove them is by recording some type of expense. Ideally, the product will be sold, either on its own or as in ingredient in another product. If that's the case, it made you money and the expense is recorded as cost of goods sold. Unfortunately, that doesn’t always happen. When something spoils or expires before you can sell it, you have to take the expense as a deduction from your net profits. In a double-entry accounting system, you would record a credit to the appropriate inventory account, which will reduce the amount of that item you have on hand. You’ll also record a debit to the spoilage expense account, which will reduce your net profit.
It’s practically impossible to eliminate all spoilage, but you can take some simple steps to reduce it. The first is proper inventory management, which for restaurants is “first-in, first-out,” or FIFO. You can reduce the incidence of spoilage by keeping your storage areas organized so older supplies are used first. The second way to reduce spoilage is through proper equipment maintenance and temperature monitoring. Generally, refrigerated goods should be maintained at about 40 degrees Fahrenheit, and frozen foods should be kept at 0 degrees F or below. Finally, be sure that you're not ordering more than you can reasonably use before spoilage occurs. If you're seeing an unusually high level of spoilage, something is wrong in one of these areas, and it calls for corrective action.
Despite your best efforts to avoid it, spoilage can still be a threat. Power outages, kitchen mishaps and equipment failures can all result in food going bad or becoming unusable. The bad news is that you’ll still have to record the expense and take the loss. The good news is that you can buy insurance to protect you from some of these kinds of losses. Spoilage insurance is a policy add-on that offers restaurants a level of protection from events like power failures and equipment malfunctions. It doesn't change the fact that spoilage is still an expense and must be recorded as such, but it can help you replenish your inventories if something major happens. Make an appointment with your agent to learn more about how a spoilage insurance rider could help you.