Third-party delivery services like Grubhub, DoorDash, UberEats, and Postmates have been growing in popularity over the past few years and will continue to grow. The industry is currently over a $15 billion dollars and is expected to grow at least 10% to 15% per year over the next five years. These services provide consumers the ability to browse menus of local restaurants all in one app or website, with ease of ordering, ease of payment and best of all delivery straight to your home. Restaurants that have not provided delivery services in the past are able to open up an additional source of generating sales which also comes with additional costs as well.
For accounting purposes, restaurants need to consider how these sales should be reported. Generally accepted accounting principles (GAAP) require restaurants to determine if there is a principal versus agent relationship with the third-party delivery service. Determining this requires a detailed analysis of the contract between the restaurant and the third-party deliver services to determine who has control of the food being delivered. If the restaurant is determined to have control, then revenue would be recorded gross of expenses. Terms of the contract that may indicate control include, who is setting the menu and menu prices, who is responsible for cost if a customer is not happy with their meal and who is responsible for refunds back to the customer.
Let’s take a look at a detailed transaction where the restaurant is determined to have control and is the principal.
Determine the fees that are involved:
- Delivery fee: Restaurants can provide their own delivery services or use the third-party for delivery. If a restaurant uses the third-party deliver, the restaurant will pay a delivery fee of 10% of the order.
- Marketing fee: Each time a customer orders from a restaurant for the first time using the third-party delivery service, the restaurant will pay a marketing fee that could range from 15% to 25%. The higher the percentage the better visibility a restaurant may have on the third-parties website.
- Credit card fee: Credit card fees could range up to 3% per transaction.
- Sales tax: The third-party delivery service will collect sales tax from customers and remit these amounts back to the restaurant who must then remit to the local/state government.
Let’s assume the following:
- Customer order comes is for $50.00 worth of food
- Delivery fee – 10% of $50 = $5.00
- Marketing fee – assume this is a first time customer and the fee negotiated is 20% so 20% of $50 = $10.00
- Credit card fee – 3% of $50 = $1.50
- Sales tax – 8% of $50 = $4.00
The journal entry to record the above transaction would be as follows:
Understanding the above accounting and what constitutes a principal versus agent relationship is imperative when negotiating contracts with third-party delivery services. If the contract is negotiated without taking the above accounting into consideration, then a detailed analysis of the contract will need to be performed to determine who is the principal and who is the agent.
If you have questions or need assistance in reviewing your contracts and determining who is the principal versus the agent, do not hesitate to reach out to a Henry+Horne restaurant professional.
Brian Campbell, CPA