HOTEL EXPENSE ACCOUNTING

In the accounting terminology, expense is an income statement account representing the

cost of items consumed in the process of generating revenue (ex. Cost of Goods Sold) or
that expires due to the passage of time (ex. Depreciation Expense). Expense cannot e
mixed !ith expenditure. "or, Expenditure represents the purchase amount (!hether paid
in cash or credited !ith the #ccounts $ayale) of a certain asset. %o illustrate, suppose,
on &anuary '
st
, ())', *+, Company paid - '),))) cash in order to purchase some
e.uipment this is called expenditure and is /ournali0ed as follo!s1
Cash - '),)))
E.uipment - '),)))
2o!ever, on Decemer 3'
st
, ())', *+, shall allocate a certain value of the initial
investment of e.uipment to e placed as an expense to sho! that a certain portion of the
e.uipment has een already used to contriute to Company4s revenue. Suppose that this
amount !as determined to e - 56). %his very amount is called an expense and is
/ournali0ed as follo!s1
Depreciation Expense7E.uipment - 56)
#ccumulated Depreciation7E.uipment - 56)
#ccording to the matching principle, all expenses must e recorded in the same
accounting period as the revenue that they helped to generate.
In the hotel industry, expenses are divided into t!o main categories1
Direct Expenses1 %hese are the expenses that vary !ith the level of production. "or
example, in the "ood and 8everage department, the Cost of "ood Sales is a direct
expense. "or, the more dishes !e serve, the more cost of "ood Sales the 2otel incurs.
9oreover, in the %elephone Department, the Cost of Calls is a direct expense. "or,
the more !e connect guests to !hatever destination !anted, the more cost of calls the
hotel incurs.
#t this very stage a rac:et !ould e opened to explain that there is a primordial
difference et!een revenue generator departments. In fact, revenue generator
departments are classified into t!o1 Service Type departments versus merchandising
departments. Service type departments are revenue generators ma:ing money from solely
providing services (Ex. ;ooms Division department). <n the other hand, merchandising
departments ensure revenue y getting use of certain ra! material, processing it, and than
sell the final product (Ex. "=8 department, %elephone department>). %herefore, only
merchandising departments have a direct expense called Cost of Sales.
Indirect Expenses1 %hese are the expenses that do not vary !ith the level of
production, or variale costs that can not e feasily distriuted to various "inancial
;eporting Centers. In the hotel industry, indirect expenses are, hence, divided into
t!o different categories1
'. "ixed Charges1 Examples might include rent, insurance, property taxes, and interest
expense. "or, these very expenses are incurred for the enefit of the hotel as a !hole
not for the enefit of each single department. %o illustrate, if a hotel insures itself
against fire, theft and urglary, and one day some valuale e.uipment has een
stolen, from any department !hatsoever, the insurance company !ill indemnify the
hotel.
(. ?ndistriuted Expenses1 Examples might include electricity, energy, and !ater
expenses. "or, usually the hotel receives a total energy ill to e paid. In the old days,
some hotels !ent for allocating this amount according to certain factors (ex. Surface,
Department ?sage>). 2o!ever, this practice proved to e misleading, since it might
under7allocate energy expenses for some departments and over7allocate it for others.
@o!adays, most of the hotels decide not to allocate such expenses any more. ;ather,
hotels report such expenses in separate schedules.
#t this stage, departments of a typical hotel !ould e listed along !ith their various
related direct expenses. Aater, examples of fixed charges and undistriuted expenses
!ould e discussed. Aast, a rac:et !ould e opened to discuss one of the most important
Direct Expenses in any hotel, !hich is $ayroll and ;elated Expenses. "or, hotels eing
descried as laor intensive companies devote a ig percentage of their financial
resources to such an expense.
I7 %ypical 2otel Departments1
'. Rooms Division Department1 It is the place !here guests receive several :inds of
services ranging from reservation, registration, to chec:out and settlement of their
accounts. %his department typically compromises a ;ooms Division manager, an
assistant manager(s), registration cler:s, cashiers, mail and information cler:, and
uniform service personnel.
%he various types of ;ooms Division department direct expenses include1
'
Commissions expenses1 %his account includes payments y the hotel to authori0ed
agents that ring room usiness to the hotel. ?sually at the end of each month, hotels sit
!ith these agents in order to reconcile their monthly sales figures and authori0e
commission payment (usually in the form of a percentage of room revenue)
;eservation expenses1 %his expense account represents any payment to various agents
contracting to ring potential room revenue usiness to the hotel. %hese agents might
have the form of Central ;eservation <ffices (Bhether affiliate or non7affiliate), Intersell
agencies>
'
Cote, ;aymond, ?nderstanding 2ospitality #ccounting II, %hird Edition, Educational Institute of the
#merican 2otel and 9otel #ssociation, 9ichigan, 'CCD, p. 6(.
Contract cleaning expenses1 %his expense account represents payment to contracting
outside cleaning agencies. Some hotels (especially small and middle si0e hotels) might
opt for contract cleaning ecause of its attractive financial implications. If this is the case,
these hotels might not e forced to have a house:eeping department, or might :eep
house:eeping staff to minimum. Such expenses should e determined in light of the
contract signed et!een oth parties (i.e. the hotel from one side and the cleaning
company from the other.)
Aaundry and dry cleaning expenses1 %his cost applies to outside laundry and dry
cleaning costs for the Rooms Division department. In most of the cases, such contracts
are signed to enefit more than one revenue generator. In this case, the ;ooms Division
department shall report the laundry and dry cleaning expenses related only to the ;ooms
Division department.
Guest transportation expenses1 %hese expenses include the cost of transporting guests
from and to the hotel via various means of transportation (ex1 9ini7uses, uses,
limousines>). If the guest transportation4s volume usiness, staff, and costs are
significantly high, then a separate department might e estalished.
Ainen expenses1 %his specific expense account includes the allocation of a portion of
linen expenditure for a specific period of time. %his practice goes along !ith one of the
accounting principles1 the matching principle. Some su7accounts of linen expense might
e1
%o!els expenses "acecloth expenses 8lan:ets expenses
Sheets expenses $illo! expenses
Guest supplies expenses1 %his account includes the various guest supplies provided
free of charge to guests in their rooms. Some su7accounts of guest supplies expenses
might include1
@e!spaper expenses Guest stationary expenses Shoe cloth expenses
Coffee expenses Briting supplies expenses %oilet re.uisites expenses
"lo!ers expenses 2angers expenses 9atches expenses
Ice expenses Candy expenses
Cleaning supplies expenses1 Such an account includes the cost of ;ooms Division4s
cleaning supplies. Some su7accounts of guest supplies expenses might include1
8rooms expenses Soaps and polishes expenses Cleaning cloths expenses
9ops expenses Cleaning chemicals expenses Dusters expenses
8rushes expenses Insecticides expenses Dustpans expenses
$ail expenses Disinfectants expenses Cleaning accessories expense
$rinting and stationary expenses1 %his expense account includes printed formats (ex1
virgin registration records, reservation records, guest folios>), office supplies (ex1 pens,
pencils, ruers, erasers>), printed manuals and guidelines for the use of the ;ooms
Division employees. Some su7accounts of printing and stationary expenses might
include1
8inders expenses "loor plans expenses $encils and $ens expenses
Eouchers expenses ;ac: card expenses ;eports expenses
Des: pad expenses Envelopes expenses In: expenses
"olio expenses
?niforms expenses1 %his expense account includes the allocation of a portion of
uniforms asset (if the hotel purchases uniforms) for a certain period of time along !ith
the expense of repairing, and cleaning them. If the hotel rents uniforms rather than
purchasing them, then the uniform expense shall include the renting cost, usually
predetermined in light of the contract lin:ing the hotel and the uniform renting company.
(. Food & Beverage Department1 %his department is responsile for the preparation and
service of food and everage to guests. It compromises the :itchen, restaurants, ars, and
any premise in !hich "ood and 8everage is served.
3. Telephone Department1 %his department is responsile to handle guest communication.
%his might e insured through connecting guests to desired locations, !hether in7house,
local or long distance calls. 9oreover, this department is usually composed of a chief
operator, supervisors, operators, and messengers. Aast, !ith the automation revolution
affecting right no! most hotels, it ecame possile to separate calls of guests and
communication handled y hotel employees, therefore, ma:ing it possile to have the
telephone department as a minor revenue generating department. "or, prior to
automation, the separation of cost of calls !as not possile and hence the telephone
department might sho! fre.uently a loss since telephone direct costs are overstated.
F. Administrative & General Department1 #ctually loo:ing at any hotel organi0ation
chart, #dministrative and General Department (referred usually as #=G) does not exist.
It is ho!ever a financial reporting centers including executives of the 2otel (ex1 General
9anager, #ssistant General 9anagers>) and other employees involved !ith executive
and financial activities (ex1 #ccounting personnel, resident 9anager, #ccounts
;eceivale cler:s, @ight #uditors>). 9oreover, if there is staff in the hotel not included
in departments due to lo! usiness volume not /ustifying the estalishment of a
department, they might e included under the #= G department (ex. Data $rocessing
Staff, %ransportation Staff, and $ersonnel Staff>).
6. Marketing Department1 %his department is composed of a mar:eting manager,
mar:eting assistant managers responsile for sales, convention, pulic relations, and
advertising functions, along !ith mar:eting personnel. %his department is a cost center
that indirectly supports revenue generators in their sole aim of generating hotel revenue.
%his can e insured, for example, through large group reservations, hence maximi0ing
room revenue, or uffet, conference, and catering opportunities rought y this very
department hence maximi0ing room revenue, "= 8 revenue, and the hotel revenue as a
!hole.
5. Property !peration and Maintenance "P!M#1 Concerned !ith the appearance and
physical condition of the uilding, the repair and maintenance of e.uipment, and ruish
removal. Some positions of this department might include $<9 manager, $<9 assistant
manager(s), electricians, plumers, gardeners, painters, and interior design specialists>
D. Data Processing Department1 %his special department might e estalished in hotels
operating under the fully automated system. 9oreover, such hotels should have
significant investment in computer e.uipment and staff to /ustify the estalishment of a
single department. If these conditions do not exist, than the Data $rocessing functions
!ould e financially grouped under #dministrative = General Department.
G. $%man Reso%rces Department1 Similar to Data $rocessing Department, if the Dollar
#mount and Staff incurred for employees4 hiring, screening, intervie!ing, selecting,
recruiting, and %raining is significant, than a 2uman ;esources Department may e
estalished. <ther!ise, 2uman ;esources functions !ould e financially grouped under
#dministrative = General Department
C. G%est Transportation Department1 If the Dollar #mount and @umer of Staff
employed in the transportation of Guests is significant, a separate Department might e
estalished. <ther!ise, guest transportation staff !ould e grouped under ;ooms
Division Department.
II7"inancial ;eporting Centers1
# "inancial ;eporting Center is an area of responsiility for !hich separate Cost
Information must e collected
9ight e classified as ;evenue Centers, Support Centers, and <ther "inancial ;eporting
Centers
'. Reven%e &enters Generate ;evenue through sales of $roducts andHor Services to
Guests
;ooms
"ood and 8everage
%elephone
Gift Shops
Garage and $ar:ing
<ther <perated Departments
;entals and other Income
(. S%pport &enters those departments that have minimal Guest Contact and do not
produce Sales. +et, they do provide services to ;evenue Centers, !hich, in turn, provide
Services to Guests
#dministrative = General
9ar:eting
$roperty <peration and 9aintenance
Data $rocessing
2uman ;esources
3. !ther Financial Reporting &enters include Energy Costs and "ixed Charges (;ent
Expense, $roperty %axes, Insurance Expense, Interest Expense, Depreciation and
#morti0ation Expenses)
Each "inancial ;eporting Center should e assigned an Identification @umer. %o
illustrate, consider the follo!ing Example1
Financial Reporting Center Identification Nu!er
;ooms ''
"ood and 8everage '6
%elephone 'D
#dministrative = General 3'
9ar:eting 35
$roperty <peration and 9aintenance 3G
Energy Costs F'
"ixed Charges 6'
"urthermore, each #ccount should e assigned an Identification @umer. 2otels
commonly opt for either the "ive7Digit (xx7xxx) or Eight7Digit #ccount @umering
Systems (xx7xxx7xxx)
III7;esponsiility #ccounting1
#im provides "inancial Information useful in evaluating the effectiveness of
9anagers and Department 2eads. %hat4s !hy only Direct Expenses should e charged to
Specific Departments
'. '(penses include the day7to7day Costs of <perating the 8usiness, the Expired Costs
of #ssets through Depreciation and #morti0ation, and the I!rite7offI of pre7paid items.
Expenses are classified as Direct expenses (Cost of Sales and <perating Expenses),
Indirect Expenses ("ixed Charges and ?ndistriuted Expenses) and Income %axes
a) Direct Expenses they are Costs incurred solely for the enefit of a particular
Department
Cost of Sales
$ayroll Expenses
$ayroll7related Expenses
<perating Supplies
China, Glass!are, Silver, and Ainen
Aaundry and Dry Cleaning
) Indirect Expenses %hey are incurred for the enefit of the 2otel as a !hole, and
cannot e identified !ith any particular Department
$roperty Insurance J
Interest Expense J
$roperty %axes J FIXE" CHARGES
;ent Expense J
Depreciation and #morti0ation J
9ar:eting Expense J
#dministrative = General Expenses J UN"ISTRI#UTE" EXPENSES
$roperty <perations and 9aintenance J
Energy Costs J
c) Income %axes it is neither a Direct Expense, nor an Indirect Expense. It should
appear as a separate Aine Item on a 2otel4s Summary Income Statement
(7Departmental '(pense Acco%nting1
Separate Expenses versus one Aump7sum #mount of Expenses
IE7$ayroll and $ayroll7related Expenses1
'. Salaries and Bages ($ayroll Expense) Includes Salaries, Bages, <vertime $ay, and
any Employee 8onuses and Commissions
(. Employee 8enefits Include Eacation and 2oliday $ay
3. $ayroll %axes Includes Social Security %axes (Employer4s $ortion)
F. Employee 9eals Includes the Cost of "ood furnished to Employees as a
Convenience to the Employer
6. Bor:er4s Compensation Insurance Includes the Expense of Bor:er4s Compensation
Insurance
5. Employee Group $lans Includes Aife and 2ealth Insurance, and <ther "orms of
Employee Group7plan "ringe 8enefits