HOTEL ACCOUNTING SKILLS
Chapter 1: INTRODUCTION TO ACCOUNTING
a) Meaning and Definition of Accounting
Accounting is often referred to as the "Language of Business." It is a systematic process that involves identifying, measuring, recording, classifying, summarizing, interpreting, and communicating financial information to users for decision-making. The primary purpose is to provide a comprehensive picture of an entity's financial health, performance, and position. It transforms raw financial transactions into meaningful, actionable reports.
b) Objectives of Accounting
The main objectives of accounting are multi-fold:
Maintaining Systematic Records: The most fundamental objective is to keep a permanent and chronological record of all financial transactions, which is legally required and prevents reliance on memory.
Ascertaining Profit or Loss: Accounting helps determine the net result of business operations over a specific period by preparing the Income Statement (Profit and Loss Account).
Determining Financial Position: It helps ascertain the financial status of the business, including its assets, liabilities, and capital, by preparing the Balance Sheet.
Providing Information to Users: It communicates financial data to various stakeholders like owners, managers, investors, creditors, and government agencies to help them make informed economic decisions.
Facilitating Management Control: It provides necessary data and reports that assist management in planning, controlling, and evaluating business activities.
c) Double Entry System
The Double Entry System is the backbone of modern accounting. It is based on the Dual Aspect Concept, which states that every financial transaction has two effects or aspects. For every debit, there must be an equal and corresponding credit, and vice-versa. This system ensures that the total of all debits must always equal the total of all credits, leading to the preparation of a balanced financial summary. It is the most comprehensive and accurate method of recording transactions.
d) Accounting Terminology
To understand accounting, a few key terms are essential:
Transaction: An event involving the transfer of money or money's worth between two or more parties.
Asset: A resource owned by the business with the expectation of future economic benefit (e.g., Cash, Buildings, Machinery).
Liability: An obligation of the business to outside parties (e.g., Creditors, Loans).
Capital: The amount invested by the owner in the business.
Revenue: The income earned from the normal activities of the business, such as sales or fees for services.
Expense: The cost incurred by the business to earn revenue (e.g., Rent, Wages).
Drawings: Money or goods withdrawn by the owner from the business for personal use.
Debtor: A person or entity who owes money to the business.
Creditor: A person or entity to whom the business owes money.
e) Classification of Accounts
For the purpose of applying the rules of debit and credit, accounts are broadly classified into three categories:
Personal Accounts: Accounts related to individuals, firms, companies, or representative groups (e.g., Ram's Account, Outstanding Salary Account).
Real Accounts: Accounts related to assets, both tangible and intangible (e.g., Cash Account, Building Account, Patents Account).
Nominal Accounts: Accounts related to expenses, losses, revenues, and gains (e.g., Wages Account, Rent Paid Account, Commission Received Account).
f) Rules of Debit and Credit
The rules for deciding which account to debit and which to credit are known as the Golden Rules of Accounting:
For Personal Accounts: Debit the Receiver, Credit the Giver.
For Real Accounts: Debit what comes in, Credit what goes out.
For Nominal Accounts: Debit all Expenses and Losses, Credit all Incomes and Gains.
g) Accounting Concepts and Conventions
These are the fundamental principles and assumptions that govern how financial transactions are recorded and reported, ensuring consistency and comparability.
Concepts (Fundamental Assumptions):
Business Entity Concept: The business is treated as a separate and distinct entity from its owner.
Money Measurement Concept: Only transactions that can be measured in terms of money are recorded.
Going Concern Concept: It is assumed that the business will continue its operations for an indefinite period.
Dual Aspect Concept: Every transaction has two effects (Debit and Credit), forming the basis of the Double Entry System.
Conventions (Customs and Practices):
Convention of Consistency: Accounting policies and methods should be applied consistently from one period to another.
Convention of Materiality: Only items that significantly affect the financial position or results of the business need to be disclosed. Trivial items can be ignored.
Convention of Conservatism (Prudence): Anticipate no profits, but provide for all possible losses.
Chapter 2: JOURNAL & LEDGER
Journal
a) Meaning
The Journal is the Book of Original Entry or the primary record of transactions. Every financial transaction is first recorded in the journal chronologically, as soon as it takes place. The process of recording a transaction in the journal is called Journalizing, and the entry itself is called a Journal Entry.
b) Format of Journal
A standard journal entry has five key columns: Date, Particulars, Ledger Folio (L.F.), Debit Amount, and Credit Amount. The accounts to be debited and credited are written in the Particulars column, followed by a brief narration explaining the transaction. The L.F. column is used during posting to the ledger.
c) Advantages
The journal offers several advantages:
Chronological Record: Transactions are recorded in the order they occur, making it easy to trace any event.
Complete Details: The narration provides a detailed explanation for each transaction, which is useful for future reference.
Error Prevention: Since both the debit and credit aspects are recorded together, the chances of a single-sided error are reduced.
Facilitates Posting: It serves as the authoritative source for transferring data to the Ledger.
d) Practicals (Journalizing)
Journalizing involves analyzing a transaction to identify the two accounts affected, determining their classification (Personal, Real, or Nominal), applying the Golden Rules of Debit and Credit, and recording the entry in the required format with the appropriate narration. For example, if cash is paid for rent, the Rent Account (Nominal, Expense) is Debited, and the Cash Account (Real, Outgoing Asset) is Credited.
Ledger
a) Meaning
The Ledger is the Principal Book of Accounts. While the journal records transactions chronologically, the ledger records them in a classified manner, where all transactions relating to a particular account are brought together in one place. It is the book from which final summaries are extracted.
b) Format
A Ledger Account is typically divided into two sides: the Debit side (Left-hand side) and the Credit side (Right-hand side). Each side has columns for Date, Particulars, Journal Folio (J.F.), and Amount.
c) Posting
Posting is the process of transferring the entries from the Journal (book of original entry) to the respective accounts in the Ledger. The L.F. column in the Journal is filled with the page number of the ledger account, and the J.F. column in the Ledger is filled with the page number of the journal entry, providing a cross-reference for verification. Posting is done on a periodic basis, not necessarily after every transaction.
d) Practicals (Balancing)
The practical aspect of the ledger involves balancing the accounts. At the end of an accounting period, each ledger account is totaled. The difference between the total of the Debit side and the total of the Credit side is called the Balance. This balance is then carried forward to the next period or used in the preparation of the Trial Balance. A debit total exceeding the credit total results in a Debit Balance, and vice-versa.
Chapter 3: TRIAL BALANCE
a) Meaning
A Trial Balance is a statement prepared with the debit and credit balances of all the ledger accounts on a specific date. It is not an account but merely a summary statement. The purpose of this statement is to ensure that the total of all the debit balances equals the total of all the credit balances.
b) Objectives
The main objectives of preparing a Trial Balance are:
Testing Arithmetical Accuracy: The primary objective is to verify that the totals of the debit and credit columns in the ledger are arithmetically equal, confirming that the double-entry principle has been correctly applied during journalizing and posting.
Locating Errors: A matched Trial Balance provides confidence that certain errors have not occurred, though it does not guarantee complete accuracy.
Basis for Financial Statements: The final, balanced Trial Balance provides all the necessary data in a single place, which serves as the foundation for preparing the final financial statements.
c) Advantages & Limitations
Advantages:
Quick Summary: It presents a quick summary of all the ledger accounts at a glance.
Error Detection: It helps in the timely detection of arithmetical errors, such as incorrect totaling of ledger accounts or improper posting.
Compliance: It is an integral step in the mandatory financial reporting process.
Limitations (Errors that do not affect the Trial Balance agreement):
Error of Omission: A transaction completely missed from the books.
Error of Commission: Incorrect amount entered in the original entry, but the same wrong amount is posted to both sides.
Compensating Errors: When an error on the debit side is cancelled out by another error of the same amount on the credit side.
Error of Principle: Journalizing or posting done in violation of accounting principles (e.g., treating an asset purchase as an expense).
Practicals (Capital and Revenue Expenditure)
a) Meaning and Examples
Capital Expenditure: This is an expenditure incurred to acquire or enhance a fixed asset that will provide benefit to the business for more than one accounting period. These are non-recurring in nature.
Examples: Purchase of a new delivery van, cost of extending a factory building, or the installation cost of new machinery.
Revenue Expenditure: This is an expenditure incurred for the normal running of the business and to maintain the earning capacity of the existing assets. The benefit of this expenditure is usually consumed within the current accounting period. These are recurring in nature.
Examples: Payment of monthly rent, salaries, electricity bill, or cost of repairs to existing machinery.
b) Distinctions
The fundamental distinction lies in the period of benefit. Capital expenditure results in the acquisition of an asset or increases the earning capacity of the business, with the benefit lasting several years. Revenue expenditure is consumed in the current period and maintains the status quo. Capital expenditure is shown on the Balance Sheet as an asset, while Revenue expenditure is shown on the Income Statement as an expense.
Chapter 4: FINANCIAL STATEMENTS
a) Meaning
Financial Statements are organized reports prepared at the end of an accounting period to present a true and fair view of the financial performance and financial position of a business. They are the final output of the accounting process.
b) Types
The primary types of financial statements are:
Trading Account: Prepared to ascertain the Gross Profit or Gross Loss from the core trading activities.
Profit and Loss Account (Income Statement): Prepared to ascertain the Net Profit or Net Loss of the business after considering all operating and non-operating incomes and expenses.
Balance Sheet (Statement of Financial Position): Prepared to show the financial position of the business on a specific date, detailing its assets, liabilities, and owner's equity (capital).
c) Objective
The main objective is to provide information about the results of operations and the overall financial health of an enterprise to help external and internal users make informed decisions regarding investment, credit granting, and management planning.
d) Preparation of Financial Statements (Without Adjustments)
The preparation process involves classifying and transferring the balances listed in the Trial Balance:
Trading Account: Items related to the purchase and sale of goods (Opening Stock, Purchases, Sales, Direct Expenses like Wages) are transferred here to calculate Gross Profit.
Profit and Loss Account: All revenue expenses and losses (Indirect Expenses like Salary, Rent, Depreciation) and revenue incomes and gains (like Interest Received) are transferred here. The Gross Profit is carried over from the Trading Account to calculate the final Net Profit or Net Loss.
Balance Sheet: All assets (Fixed and Current) and all liabilities (Long-term and Current) are transferred here. The Net Profit or Loss from the P&L Account is added to or subtracted from the Owner's Capital. The total of Assets must equal the total of Liabilities plus Capital.
e) Practicals
The practical process involves the systematic transfer of every single account balance from the Trial Balance to its correct final location (Trading, P&L, or Balance Sheet). For example, Salaries is an indirect expense and goes to the Debit side of the P&L Account, while Buildings is a fixed asset and goes to the Asset side of the Balance Sheet.
f) Software used for handling hotel accounts and financial statements
The hospitality industry relies heavily on integrated software systems:
Property Management Systems (PMS): Systems like Opera or Cloudbeds handle core operational data like reservations, guest folios, and check-in/out, generating raw revenue data (Room Revenue).
Point of Sale (POS) Systems: Systems used in Food & Beverage outlets, retail stores, and spas that track sales, inventory, and cost of goods sold.
General Ledger (GL) Accounting Software: Commercial software like SAP, Oracle, or specialized mid-market solutions like QuickBooks or Sage are used to perform the main accounting functions, integrating the summarized data from the PMS and POS. These systems are crucial for generating the final financial statements.
Chapter 5: UNIFORM SYSTEM OF ACCOUNTS FOR HOTELS (USOA)
a) Meaning
The Uniform System of Accounts for the Lodging Industry (USALI or USOA) is a standardized accounting system developed specifically for the hotel and lodging industry. It prescribes a common chart of accounts, standard formats for financial statements, and definitions for revenue and expense classifications. This system ensures that all hotels report their financial results in a consistent and comparable manner.
b) Advantages
The USOA offers significant advantages, particularly in a multi-property environment:
Comparability and Benchmarking: Since all hotels use the same classification and format, managers can compare the financial performance of different departments, properties, or even competitors easily.
Consistency in Reporting: It provides a clear, uniform structure for preparing the Income Statement, ensuring reports are consistent across accounting periods and locations.
Enhanced Management Control: The detailed departmental breakdown allows management to pinpoint areas of excessive cost or underperformance.
c) Preparation of Income Statement under USOA
The USOA Income Statement focuses on two main cost categories before arriving at the final income:
Departmental Operating Income: This is calculated by taking the revenue of each operating department (like Rooms, Food & Beverage) and subtracting only the direct, controllable expenses of that department to arrive at a Departmental Profit or Loss.
Undistributed Operating Expenses: These are expenses that cannot be easily assigned to one specific revenue-generating department, such as Administrative and General, Marketing, and Property Operation and Maintenance. These are subtracted after summing up all departmental profits to arrive at Gross Operating Profit (GOP).
d) Preparation of Departmental Schedule under USOA
A Departmental Schedule provides a detailed, granular breakdown of the revenues and expenses for a single operating department, such as the Rooms Department or the Food & Beverage Department. This schedule details all direct costs (like payroll, supplies, and commissions specific to that department) that are subtracted from the department's revenue to calculate its Departmental Profit.
e) Practicals
A practical application involves correctly allocating expenses. For example, the salary of a front desk agent goes to the Rooms Departmental Schedule (a direct cost), but the salary of the General Manager is an Undistributed Expense and goes to the Administrative and General section of the main Income Statement.
Departmental Accounting
a) Meaning
Departmental Accounting involves maintaining separate accounts for each department of a business, particularly for revenue-generating or cost-incurring units. It treats each department as a separate responsibility center for reporting purposes.
b) Objectives
Profitability Analysis: To accurately determine the profit or loss generated by each individual department.
Performance Evaluation: To assess the efficiency and performance of the departmental manager and the resources utilized.
Control and Cost Reduction: To identify inefficient departments and implement cost control measures more effectively.
Informed Decision Making: To help management decide whether to expand, contract, or discontinue a specific department.
c) Advantages
Departmental accounting provides a more refined view of the business than overall company financial statements, leading to better resource allocation, enhanced accountability, and improved overall operational efficiency.
d) Cost Allocation and Cost Apportionment
Cost Allocation: Assigning a direct expense to the specific department that directly caused the expense. For example, the cost of supplies used only by the Housekeeping Department is directly allocated to that department.
Cost Apportionment (or Distribution): Dividing an indirect expense, which benefits multiple departments, among those departments using a fair and appropriate basis (e.g., floor area for rent, number of employees for cafeteria costs).
e) Preparation of Departmental Income Statement
This statement is prepared only for a single department. It lists the department’s revenue and subtracts only the expenses directly attributable to it. This statement is similar to the Departmental Schedule in the USOA, focusing purely on controllable, direct revenues and costs to determine the department's contribution to the overall profitability.
f) Practicals
A practical exercise involves taking a common cost, like the annual fire insurance premium, and deciding the basis for its apportionment. Since insurance is related to the value of the assets, the cost would be apportioned to different departments based on the total value of the assets located in each department.
Click here for PPT