One of the most common errors in the financial statements of restaurants is the incorrect recording of food and beverage comps — food or beverage served free of charge, or sold at prices lower than normal retail. And if you have a lot of comps, your income statement will be greatly distorted if they are not handled correctly.
The biggest impact is in the calculation of cost of sales. When calculating cost of sales, it's essential that you only include the cost of products that contribute to revenue... not amounts for which no payment is expected or that do not represent sales to guests. In other words, sales and cost of sales must not include the retail value or cost of comps. (Note: This does not employee meals. For more information on employee meals, read Let Them Eat Cake) These are the two most common errors:
Error #1: Comps aren't recorded
Balancing the daily cash is easier when comps are disregarded because revenue more or less equals receipts. But this causes cost of sales to be overstated by the cost of the product that was given away, and makes it difficult to determine if the menu is priced correctly or if there is a problem with theft or excessive waste.
Error #2: Comps are recorded as a marketing expense
In other words, comps are included in sales, and the retail value, or the difference between the retail price and the cash received, is recorded as a marketing expense (e.g., "Promotion").This solves the problem of an incorrect cost of sales ratio, but now sales, cost of sales and marketing amounts are overstated, causing all expense ratios other than cost of sales to be understated, and any expense or liability based on sales (e.g., rent or sales tax) may be overpaid. And, of course, the true marketing expense is not the retail value of comps, but rather the cost of those comps.
To keep the relationship between sales and cost of sales remains "pure," deduct the cost of comps from cost of sales and expense it elsewhere, and eliminate the retail value of the comps from sales and expenses. These are the basic steps:
Initially, comps are recorded at retail value in the appropriate sales category (food or beverage), and the offset for payment not received is temporarily expensed in a marketing account.
At the end of the accounting period, and after cost of sales have been adjusted for the period-end physical inventories, food and beverage cost of sales percentages are calculated.
The retail values of the comps for the period are then multiplied by the appropriate cost percentages (food comps X food cost of sales percentage; beverage comps X beverage cost of sales percentage). The results are the costs of food and beverage comps, respectively.
A journal entry is made to reverse the retail value of comps from the sales and expense accounts. A second journal entry is made to record the cost of comps as a marketing expense and reduce cost of sales by the same amounts.