Does Inventory Count as End-of-Year Restaurant Profit?
According to the tax form that every restaurant business must complete for the Internal Revenue Service, inventory that has been purchased during the year but has not been used during the current year counts as part of year-end profit and is deducted from the restaurant's cost of goods sold. Inventory is a an asset, or something that the business owns. Furthermore, it is an asset that will be used up during the coming year in the course of the restaurant's daily operations.
Inventory includes all materials that are part of the physical product that a restaurant provides to its customers. The bowls and pots that the restaurant uses to cook its menu offerings are not considered inventory, because the restaurant continues to own them after they have been used. However, the ingredients that are used for cooking as well as disposable takeout packaging and amenities such as napkins and plastic forks are considered inventory, because the customer uses or consumes them, and then they no longer belong to the restaurant.
A restaurant calculates its annual profit by subtracting its annual revenue from its annual operating expenses. Inventory that has been purchased but has not yet been used cannot be legitimately listed as an operating expense because the sums the business spent on these items have not yet been recouped by turning that inventory into sales. Year-end inventory contributes to the amount of profit that the restaurant reports by lessening the value of the expenses it can write off against its revenue.
Inventory is reflected as an asset on a restaurant's balance, sheet because it represents something that the business owns as well as an item that adds to its future earning potential. The convention of listing inventory as an item on a restaurant's balance sheet reflects the fact that the items that the restaurant has on hand have been purchased with revenue that has been earned. Like money in the bank, this inventory will be used to generate future sales but has not yet been used in a way that qualifies as a legitimate operating expense.
The IRS tax form that restaurants use to report profit and loss includes a section for calculating preliminary profit based on cost of goods sold, or the most basic operating expenses of materials and labor. Ending inventory from the previous year is added to the total value of materials or ingredients purchased during the current year, and then ending inventory is subtracted from this amount, lessening the value of purchases that can be subtracted from revenue when calculating profit.