inKind is an unconventional source of financing that is emerging everywhere for restaurants. inKind advances interest-free capital to restaurants in exchange for credits that inKind app users can redeem for a discount at the restaurants within a specified period. Customers use the inKind application at restaurants to pay their bills and receive a 20% discount. The platform is also used by businesses to book corporate events and provide employee benefits using the same credit model. In this article, we will explain how inKind works in detail and how to account for inKind transactions, ensuring your financial reports provide accurate and valuable information and helping you avoid theft and fraud in your restaurant.
How does inKind work for Restaurants?
A restaurant or bar sells credits to inKind at a 50% discount. The credits give inKind the privilege to allow its app users to use those credits to dine at the restaurant for a 20% discount. Therefore, inKind’s cut is the difference between the 20% discount given to its customers and the 50% discount at which they have purchased your credits. The credit is applied to the entire bill, like any other payment method or gift card, but it excludes the tips, which are paid separately by the customer via credit card. Therefore, the discount only applies to the sales plus sales tax portion of the bill, not to tips. As a result, the 50% discount effectively results in a higher discount rate, depending on the sales tax rate in your state.
For example, assume inKind buys $100,000 worth of credits from your restaurant for $50,000, effectively a 50% discount. Customer A uses the inKind app to pay for their meal at your restaurant. Customer A has a $100 tab, plus $10 in sales tax and $20 in tips, for a total of $130. They can pay the $110 using their inKind app, applying a 50% discount to the $110 ($100 + $10). Therefore, the restaurant receives $50 for $110, effectively a 55% discount. However, you do not pay credit card processing fees on these sales, as the payment is being processed via inKind. Therefore, the discount could effectively be about 52-53% depending on your credit card processing fees. The tips are then remitted to your restaurant separately from inKind using Stripe.
Suppose the credits are unredeemed within a specific period. In that case, the unused portion of the credits/advance may convert to a loan with interest via a credit buyback agreement, depending on your agreement with inKind.
If inKind estimates that the credits will run out, they’ll encourage the restaurant to sell more credits (at the same discount) to them. If the credits sell out, inKind will continue to make the credits available for up to a certain number of days after they’ve run out to ensure a smooth transition off the app and will reimburse the restaurant for all used credits at the same discount ratio.
Additionally, inKind typically requires exclusivity; therefore, you can’t offer similar discounted credits on any other platform, such as Groupon, while using inKind. However, you can continue to provide standard discounts and comps on premises as usual.
inKind for Restaurant Groups
Restaurant groups can offer credits to inKind for all their locations, while only receiving a cash advance or capital at one location. For example, a restaurant group has 5 locations, all with different ownership but with a common management company. The management company can partner with inKind to receive a cash advance in exchange for credit at all of its restaurants. As a result, inKind app users can receive a 20% discount when using the inKind app at all the concepts/restaurants managed by that management company. The management company will be responsible for tracking the amounts owed to/from the restaurants it operates in this scenario. inKind will provide a statement showing redemptions by each restaurant along with the total outstanding credits for the group.
Accurately accounting for inKind transactions in a restaurant group is extremely important, especially when ownership for each location is different, so you can track precisely how much cash each restaurant is entitled to for the credits redeemed at their location.
Accounting for inKind to Ensure Accuracy and Reduce Fraud
If inKind advances are not accounted for accurately, they can significantly alter the accuracy and reliability of your financial reports and even result in disastrous income tax implications. inKind advances are not revenue, and should never be treated as such. inKind advances are loans against future sales with a 55% promo cost. Therefore, accurate accounting for inKind transactions should properly match the promo expense of inKind with the sales that it relates to in the same period. Accurate accounting for In-Kind transactions will also prevent and detect bad actors from using the inKind payment tender as a catch-all payment method to compensate their friends.
Here is a step-by-step guide illustrating how to account for transactions through inKind for your restaurant, assuming inKind advances $60,000 in cash to X restaurant in exchange for a $120,000 credit that inKind customers can redeem at X restaurant.
Step 1 – Add inKind Payment Tender to the POS
Upon initiating inKind, the restaurant or bar should add inKind as a payment tender in their POS so they can check out guests.
Step 2 – Add inKind Liability Accounts to your Chart of Accounts
You’ll need to set up the following accounts:
- Profit & Loss > Expenses:
- inKind Promo Expense
- Balance Sheet > Liabilities:
- inKind Credit Liability
- inKind Credit Liability Contract (a contra/sub-account of inKind Credit Liability)
- Net inKind Credit Liability (the sum of the accounts above – automatic in most accounting systems)
The inKind Credit Liability is going to track the gross amount (the value of the credits, not the amount of cash advance you received from inKind) of unredeemed credits.
Step 3 – Record the Cash Deposit from inKind
When the $ 60,000 advance is received from inKind, it should be grossed up to its $120,000 value and recorded as an inKind Capital Liability, allowing you to track the liability in terms of unredeemed credits. The 50% discount should be booked to inKind Credit Liability Contract (a contra liability account), so you can track the net inKind liability in terms of dollars. Therefore, the entry upon payment receipt should be:
Step 4 – Capture an inKind Customer Sale
When a customer uses inKind to pay for a tab, the restaurant rings up the sale in the POS and uses inKind as the payment tender. Therefore, the daily sales journal entry for capturing the inKind sales should be as follows:
As a result, the inKind Credit Liability account now reflects your unredeemed credit balance.
Step 5 – Reconcile the Stripe Deposit with Tips Payable
The tip portion of the transaction above is remitted to the restaurant from inKind separately using Stripe. This Stripe deposit should be grossed up and credited to the inKind Capital Liability account, as that’s where the entire inKind payment tender debits. Therefore, the entry for a $19 (net of Stripe processing fees) deposit for a $20 tip should look like this:
This adds the $20 tip back to the inKind Credit Liability balance, ensuring the tip amounts do not understate it. Only sales + sales tax can reduce your credits.
Step 6 – Reconcile the inKind Credit Liability with the inKind Monthly Statement
At month-end, the inKind Credit Liability account balance on the balance sheet should match the amount of outstanding credits shown in the inKind monthly statement. The difference between the debits and credits in the inKind Credit Liability account should match the redemptions/credits sold in the inKind statement. If it doesn’t, record a JE to true it up. These should be minimal adjustments. If the adjustments are material, you must investigate.
Step 7 – Record the inKind Promo Expense
Since the 50% discount ($120,000 credit for $60,000 cash) is never rung up through the POS, the Net In-Kind Credit Liability balance will be understated. Therefore, at the end of each period, you must calculate and recognize the promo/interest expense on the redemptions for that period and make a JE as of the most recent period. You can recognize this promotional expense as frequently as you like, but at a minimum, it should be done monthly or at least on a per-reporting-period basis. The inKind Promo Expense is calculated as credits redeemed for the period/month multiplied by 50%. For example, a $110 redemption at 50% would look like this:
As a result, (1) the inKind Promo Expense will accurately reflect your inKind promo/interest expense based on the inKind redemptions for that period, and (2) the Net inKind Liability will reflect the amount of the advance you received, which has yet to be redeemed. The inKind monthly statement does not show the Net inKind Liability in terms of how much of the advance you have redeemed; it only shows the amount of unredeemed/outstanding credits. You can verify the Net inKind Liability balance by confirming it’s 50% of the inKind Credit Liability balance.
Additional Accounting Steps Required under Accounting Standard Code (ASC) 606
ASC 606 is a set of accounting rules in the US Generally Accepted Accounting Principles (GAAP) that dictate how companies should recognize revenue from contracts with customers. If your restaurant(s) require a GAAP audit, then you may need to add the following steps to the accounting cycle to be GAAP compliant:
- Accounting for Interest Expense of the inKind Credit Liability
- Accounting for Breakage
Accounting for Interest Expense of the inKind Credit Liability
Ultimately, the capital provided by inKind is a loan. And GAAP requires you to accrue and report interest expense on the loan portion of the transaction. As explained above, the Net inKind Credit Liability balance represents the dollar amounts (not the credits) owed to inKind at any given point in time. Therefore, if the credits aren’t redeemed within a year, you may need to calculate and accrue interest expense on the Net inKind Credit Liability balance each month. The interest expense increases the Net inKind Credit Liability balance by decreasing the inKind Credit Liability Contract account balance. When credits are redeemed, the inKind promo expense is adjusted to reflect the interest-adjusted promo expense, ensuring the Net In-Kind Credit Liability balance always reflects the amounts owed to In-Kind in dollars. Accounting for recognizing interest expenses associated with inKind capital can become very complicated and time-consuming; therefore, it’s outside the scope of this article and likely not worth pursuing unless you require GAAP financials.
Accounting for Breakage
GAAP may also require you to record breakage as revenue for the portion of credits that may go unredeemed, similar to gift cards. This may seem silly, as the Net inKind Credit Liability balance must be repaid with interest if the credits are unredeemed.
However, GAAP aims to align revenue with expenses. Since you’re accruing interest expense under GAAP for the financing component of the inKind advance (which ends up reducing your future promo expense upon redemption), you must also accrue breakage revenue for estimated unredeemed credits. Accounting for breakage is outside the scope of this article, but if you would like to learn more, please feel free to contact us.
Should I Use inKind for My Restaurants?
inKind for restaurants can be a cost-effective alternative to conventional debt or equity financing in specific scenarios. In this article, we have illustrated how to accurately account for inKind transactions, ensuring that your financial reports provide valuable and actionable insights, and that you avoid fraud by reconciling inKind payment tenders.
As you can see, the accounting and bookkeeping for inKind transactions is time-consuming and slightly complex If you want to learn how to assess whether inKind is a good fit and viable financing source for your restaurant, or you’re looking for a bookkeeper or accountant who can provide accurate, consistent, and timely financial reporting, please contact us to learn more.
