Now, let’s look at how income and expenses affect the owner’s equity. We’ll explore the relationship between expenses and income with assets and owner’s equity within the financial management concept.

Business Profit

Besides generating revenue, we also aim for profit! Profit (or net income) happens when income exceeds expenses.

Income will increase the owner’s equity, while expenses will reduce it.

The Relationship Between Assets, Equity, Income, and Expenses

Let’s say our restaurant prepares Salmon Fish Head Curry priced at RM 60 and sells it for cash. The cost of raw materials, including other expenses to prepare the dish, is RM 20.

So, the net income from the sale of the Salmon Fish Head Curry is RM 60 – RM 20 = RM 40. This sale will increase the owner’s equity by RM 40.

This sales transaction will also increase cash and owner’s equity by RM 60. Meanwhile, expenses will reduce cash and owner’s equity by RM 20.

Let’s now look at the accounting equation involved:

Aset               =  Liability         +    Equity
Cash     RM 1,900  +    Notes                Capital
Sale     RM    60  -    payable RM 4,000     Kak Ya   RM 5,000 +   
Expenses RM    20                            Sale     RM    60 -
         --------                            Expenses RM    20 
         RM 1,940
         --------
Rental   RM 2,100
Kitchen  RM 5,000
         --------
Total RM 9,040    =            RM 4,000 +             RM 5,040
         ========                 ========            ========

Let’s see how assets increase by RM 40. Similarly, the owner’s equity increases by the same amount.

When the Salmon Fish Head Curry is sold for RM 60, the business receives cash, which increases the assets (cash) by RM 60. However, since the expenses for preparing the dish are RM 20, these expenses reduce cash by RM 20.

Therefore, the net effect on assets is:

• Cash Inflow (Revenue): RM 60
• Cash Outflow (Expenses): RM 20
• Net Increase in Assets (Cash): RM 60 – RM 20 = RM 40

At the same time, because the business made a profit (net income) of RM 40, the owner’s equity also increases by RM 40. This is a result of the profit being retained within the business, thereby increasing both the asset (cash) and the equity by the same amount.

In summary:

• Assets (Cash): +RM 40
• Owner’s Equity: +RM 40

This reflects the core principle of the accounting equation:

Assets = Liabilities + Owner’s Equity

In this case, since there are no liabilities involved, the increase in assets directly translates to an increase in the owner’s equity.

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Assets, Liabilities, and Equity

Assets in a food business and restaurant include cash, accounts receivable, goods, land, buildings, food and beverage inventory, and also investments made.

Assets can be provided by the owner or obtained through loans from banks or lenders.

Assets provided by the owner are called equity. Assets acquired through loans/debt are liabilities.

Accounting Equation

The most basic form of the accounting equation explains what the restaurant owns versus what it owes.

The most basic accounting equation:

Assets = Liabilities + Owner’s Equity

If the restaurant’s debts (liabilities) are subtracted from the assets:

Assets – Liabilities = Owner’s Equity

Basics of Financial Statements

The basics of a financial statement (balance sheet) – assets must equal (balance against) liabilities and (+) owner’s equity. Let’s use the example of Warung Terlolap Mato and Kak Ya as its owner.

Let’s say Kak Ya has RM 5,000 in cash. Kak Ya uses this RM 5,000 as capital to open a restaurant:

                 WARUNG TERLOLAP MATO 
             ------------------------- 
           Assets        =      Owner's Equity 
      Cash RM 5,000           Capital   RM 5,000

OK, Kak Ya rents a restaurant building, let’s say for RM 700 per month for three (3) months, totaling RM 2,100. This means cash has decreased (RM 5,000 – RM 2,100 = RM 2,900). So, what is the impact of this transaction on the basic accounting equation? Let’s take a look:

           Assets       =      Owner's Equity 
      Cash   RM 2,900         Capital  RM 5,000 
                + 
      Rental RM 2,100

         Assets             =         Liability + Equity 
    Cash        RM 1,900           Notes Payable   Capital 
                                     RM 4,000      RM 5,000

    Rental      RM 2,100 
    Kitchen Set RM 5,000 
    --------------------
    Total       RM 9,000   =        RM 4,000   +  RM 5,000 
   =====================            ========      ========

                   ASSETS                  LIABILITY 
                     (RM)                                                (RM)

   Cash        1,900.00         Notes Payable       4,000.00
   Rental      2,100.00 
   Kitchen Set 5,000.00        EKUITI PEMILIK 
                                Capital             5,000.00 
               --------                             --------
   Total       9,000.00        Liability + Equity   9,000.00 
   Assets      ========                             ========

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Cash Business Transactions

Business transactions in food stalls and restaurants involve cash exchanges, such as when purchasing goods from suppliers. Similarly, customer payments for ordered food and drinks are also part of cash transactions.

Non-Cash Transactions

Non-cash transactions also occur in food stalls and restaurants. Examples include:

• Equipment wears out over time, and its value decreases according to the current market price. Adjustments for these decreasing values are called depreciation.
• Accounts receivable for debts that cannot be collected (bad debt).

All these transactions must be recorded—whether they involve cash or depreciation in business value.

The post Financial Management for F&B Business #5 – Business Transactions appeared first on Gerbang Bisnes.

GAAP Concepts

The key concepts in GAAP include:

Business Entity:

A restaurant is a separate business entity from its owner, generating income, incurring expenses, managing assets, and handling liabilities.

Historical Cost:

Asset values are recorded based on their original purchase price, though the current fair value may change over time, such as property values increasing or equipment depreciating.

Going Concern:

The assumption is that the restaurant will continue to operate indefinitely unless there is evidence to the contrary.

Periodicity:

Financial statements must be prepared at regular intervals, such as monthly for management decisions and annually for tax purposes.

Expenses Matched with Revenues:

Expenses must be aligned with revenue in financial reporting, with accrual accounting recognizing income and expenses when they occur, regardless of cash flow.

Conservatism:

Potential losses should be recorded as soon as they are likely, while gains are only recorded when they are certain.

Consistency:

Financial information must be collected and reported consistently each year for accuracy and reliability.

Materiality and Practicality:

The practicality of reporting minor financial events or sensitive matters should be considered.

Effective Accounting

Three important characteristics of effective accounting under GAAP are:

1. Financial information must be relevant for decision-making, monitoring, and tax purposes.
2. The information must be up-to-date for daily operations and timely reporting.
3. Financial data must be accurate to provide a true picture of the financial health of the business.

The post Financial Management for F&B Business #4 – GAAPs appeared first on Gerbang Bisnes.

Small Eateries and Restaurants

In small eateries and restaurants, financial management tasks are usually performed by the owner who also serves as the manager. The owner provides financial information to monitor and make decisions related to their establishment.

More complex accounting processes, such as preparing financial statements for tax purposes, often require external expertise. This information needs to be prepared by a qualified external accountant.

Financial Management Responsibilities

The scope of financial management responsibilities will increase as your eatery or restaurant grows. With the growth of the restaurant and the addition of staff, the responsibilities may include:

• Bookkeeper: Organizes records and documents such as hours worked, invoices, data from sales registers or POS systems, and more.
• Accountant: Designs and monitors data collection and source documents, summarizes financial information into financial statements, creates reports for management, coordinates budget planning, collects tax information, and reports to relevant authorities (e.g., SSM). Accountants typically report to the controller.
• Controller: In larger companies, this role is often referred to as Chief Accounting Officer or Chief Financial Officer. This position oversees the accounting department.
• F&B Controller: Develops operating and control reports, including product receipts, storage, and inventory management for food preparation, among other tasks.
• Internal Auditor: Assesses the effectiveness of the financial management system. Essentially, this involves performing audits.
• External Accountant & External Auditor: External parties who provide independent evaluations, audits, and opinions on the operations and finances of your eatery or restaurant.

The post Financial Management for F&B Business #3 – Roles and Responsibilities appeared first on Gerbang Bisnes.

“The process of organizing, analyzing, interpreting, recording, summarizing, and reporting financial information in ways that are meaningful for owners, managers, and other internal users and for lenders, and for other external users. Also referred to as accounting.”

The key terms in financial management or accounting are: organizing, analyzing, interpreting, recording, summarizing, and reporting financial information. It also means accounting.

Financial Management in Restaurants

For restaurant financial management, restaurant managers use financial information to manage daily operational activities. This is closely related to the revenue and profits earned, as well as daily expenditures. It’s about money coming in and going out.

Financial information needs to be organized and meaningful. Analysis and interpretation of this information are crucial. That’s why it needs to be recorded, summarized, and reported to those who need it. For example, the restaurant owner needs to understand the economic health of the restaurant.

Financial Management vs. Bookkeeping

Bookkeeping involves analyzing and recording specific financial transactions such as sales, revenue collection, and payroll. Data from bookkeeping is then summarized by accountants for interpretation by management.

Areas of Accounting

Some specialized areas in accounting/financial management include:

• Financial Accounting: The entire process of creating and using accounting information to make business decisions. Deliverables in this area include financial statements such as balance sheets, income statements (profit & loss), and statements of cash flows.
• Audit: Auditors assess whether controls or measures for managing cash and inventory are in place and effective. The financial management system is also evaluated to ensure that financial information is recorded and reported accurately. Financial reports are assessed to determine if they truly represent the financial position, operating results, and cash flows, and whether accounting principles are consistently applied.
• Managerial Accounting: The process of planning using financial information, both historical and forward-looking estimates. For example, in a restaurant, this might involve identifying the most popular dishes ordered by customers!
• Tax Accounting: Planning and preparing financial information for the purpose of filing and paying taxes to the government.

The post Financial Management for F&B Business #2 – What is Financial Management? appeared first on Gerbang Bisnes.

Who is this important for?

Financial management/accounting is crucial and involves everyone connected to the food and restaurant industry:

• Guests/Customers – We can monitor the costs involved in serving customers to ensure the restaurant remains profitable. Understanding the restaurant’s financial status helps us plan for customer satisfaction.
• Employees – We need to account for employee costs such as wages, taxes, EPF (Employee Provident Fund), SOCSO (Social Security Organization), and the benefits they are entitled to (like healthcare benefits).
• Suppliers/Vendors – We need to assure them of the business’s creditworthiness, earning their trust!
• Owners/Investors – This is especially important if we are the owners or investors. Financial information must be accurate and accessible when needed. We need to understand the overall financial state of the business for monitoring and decision-making. Financial reports are also required for submission to relevant authorities (like SSM, customs, and the tax department) and for bank loans.
• Government Agencies – There are legal requirements to provide proper financial reports.

Don’t we have accountants for this?

Maybe you have other responsibilities and think:

“No need to worry about all these accounting matters, just leave it to the accountant!”

Right? But hold on… read this first…

Why is financial management important?

We need to understand financial management in order to:

• Have the necessary information to control the restaurant in both the short and long term.
• Understand the financial reports being prepared.
• Correct certain situations to improve the restaurant’s profitability.
• Make informed decisions based on the potential or impact the financial reports show on the business.

How can we learn about this?

The easiest way to understand financial management is by learning and doing it! Maybe, in the beginning, we do it ourselves. Once we understand it, we can hand it over to the accountant. After all, it’s a small business. But eventually, hiring an accountant becomes necessary! And once you understand it, you’ll know exactly what to do with the accountant’s reports!

The post Financial Management for F&B Business #1 – Introduction appeared first on Gerbang Bisnes.