In most cases, the largest percentage of a restaurant’s assets is represented by
its investment in furniture, equipment, building, and land. These are referred
to as fixed assets (those resources that are expected to benefit the restaurant
for at least one year). In this article you will learn how these assets are accounted.
You will see, for example, that they are managed differently from current
assets (those whose benefits will be realized in less than one year).
Restaurant managers seeking to acquire fixed assets often have the
choice of purchasing or leasing them. The decision to buy or lease affects the
manner in which the asset is accounted for, and this is carefully explained in
A key concept that must be understood when accounting for many types
of fixed assets is that of depreciation. Simply put, depreciation is a method
by which the fixed asset’s value is reduced as its long-term ability to generate
income for the restaurant is reduced. In this article, the two most commonly
used approaches to depreciation are explained, as are the procedures for
computing depreciation values using each approach.
When a restaurant manager decides to dispose of a fixed asset, regardless
of any value it may have, the accounting procedures used to record
this disposal are related to the depreciation methods previously used. In this
article, the disposal of fixed assets is thoroughly reviewed, as are the procedures
for recording the asset’s sale (or, if appropriate, its scrapping). In
some cases, one fixed asset is traded in for another newer or better asset.
When this exchange happens, it must be accounted for properly, and this
article shows how.
Lastly, the article describes “other assets” (those not accounted for elsewhere
in the balance sheet) in detail.
A restaurant’s assets are of two types: current assets and noncurrent assets.
Current assets are expected to be converted into cash within one year.
Noncurrent assets are expected to have a life of greater than a year. The four major
categories of noncurrent assets include fixed assets, deferred expenses, noncurrent
receivables (amounts owed to the restaurant by owners and officers that
are not due within 12 months), and “other assets.” Both fixed assets and other
assets are discussed in this article.
Fixed assets include both assets that are depreciated (buildings and equipment)
and others that are not depreciated (land). Fixed assets constitute the largest
percentage of the total assets of a restaurant.
The Uniform System of Accounts for Restaurants uses the following classifications
for fixed assets: land, buildings, cost of improvements in progress; leaseholds
and leasehold improvements; furniture, fixtures, and equipment (FF&E); and
uniforms, linens, china, glass, silver, and utensils.
Expenditures for fixed assets are capital expenditures
rather than revenue expenditures. Revenue expenditures
are those expenditures a restaurant makes
for which the benefits are expected to be received
within a year or less. Examples include wage and utilities
expenses. Capital expenditures are expenditures
for which benefits are expected to be received over a
period greater than one year. (When a restaurant is
built, its owners expect to realize the benefits over
many years.) Capital expenditures must not be
recorded as revenue expenditures because of the impact
these entries have on the income statement. If a
capital expenditure with a life of ten years is recorded as a revenue expenditure,
all of the expense will be recorded in one year instead of spread over ten years.
This would distort the restaurant’s income statements for all ten years. (Net income
for year one would be understated; net income for years two to ten would