Basic Hospitality Accounting

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HOSPITALITY ACCOUNTING OVERVIEW
Hospitality business operations, as well as others, are generally identified as having a number of different cyclical sales revenue cycles. First, there is the daily operating cycle that applies particularly to restaurant operations where daily sales revenue typically depends on meal periods. Second, there is a weekly cycle. On the one hand, business travelers normally use hotels, motels, and other hospitality operations during the week and generally provide little weekend hospitality business. On the other hand, local people most often frequent restaurants on Friday through Sunday more than they do during the week. Third, there is a seasonal cycle that depends on vacationers to provide revenue for hospitality operations during vacation months. Fourth, a generalized business cycle will exist during a recession cycle and hospitality operations typically experience a major decline in sales revenue. The various repetitive accounting cycles encountered in hospitality operations create unique difficulties in forecasting revenue and operating costs. In particular, variable costs (e.g., cost of sales and labor costs) require unique planning and procedures that assist in budget forecasting. Since hospitality operations are people-oriented and people-driven, it is more difficult to effectively automate and control hospitality costs than it is in other non hospitality business sectors. Unfortunately, most accounting textbooks and generalized accounting courses emphasize accounting systems using procedures and applications that are applicable to services, retailing, and manufacturing businesses. These types of businesses do not normally require the use of the unique accounting procedures and techniques required by hospitality operations. In manufacturing operations, all costs are generally assigned to products or product lines and identified as direct costs and indirect costs. Direct costs include all materials and labor costs that are traceable directly to the product manufactured. Indirect costs generally refer to manufacturing or factory overhead, and include such items as factory supporting costs such as administrative salaries, wages and miscellaneous overhead, utilities, interest, taxes, and depreciation. The basic nature of indirect costs presents difficulties isolating specific costs since they are not directly traceable to a particular product. Portions of supporting indirect costs are assigned by allocation techniques to each product or product line. However, a hospitality operation tends to be highly departmentalized with separate operating divisions that provide rooms, food, beverage, banquet, and gift shop services. A hospitality accounting system must allow an independent evaluation of each operating department and its operating divisions. Costs directly traceable to a department or division are identified as direct costs. Typically, the major direct costs include cost of sales (cost of goods sold), salary and wage labor, and specific operating supplies. After direct costs are determined, they are deducted from revenue to isolate contributory income, which represents the department’s or division’s contribution to support undistributed indirect costs of the whole operation. Indirect costs are those costs not easily traceable to a department or division. Generally, no attempt is made at this stage of the evaluation to allocate indirect costs to the department or divisions. Managers review operating results to ensure that contributory income from all departments or divisions is sufficient to cover total indirect costs for the overall hospitality operation and provide excess funds to meet the desired level of profit.

GENERAL FINANCIAL ACCOUNTING TERMS

The objective of this text is to provide managers in the hospitality industry with a working knowledge of how an accounting system develops, maintains, and provides financial information. Managerial analysis is enhanced with an...
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