Accounting Principles for Hospitality and Tourism (HTB2004) Temasek Polytechnic

TOPIC 5: REVENUE & RECEIVABLE CYCLE

Learning Objectives

At the end of the lecture, you should be able to:

1 Describe the process flow of the revenue and receivable cycle and identify
some of the accounting source documents used.
2 Distinguish between cash and credit transactions.
3 Explain the difference of Guest Ledger and City Ledger.
4 Describe the credit policy of a hotel and its collection procedures.
5 Explain the concept of bad debts and its provision.
6 Describe the internal control procedures over cash and receivable.
7 Describe the workings of a Point-of-Sale system.
8 Explain the controls in a Point-of-Sale system with respect to inventory and
cost controls.

Reading:
Chapter 5, Accounting for Specialized Industries & Operations in Singapore
edited by Lee Meng Hye & Teoh Hai Yap (Hotel Accounting by
Leong Choon Chiang & Herbert P. Schoch)
Chapter 14, Hospitality Accounting by William S Gray

Introduction

In a hotel setting, there are several major transaction cycles. These cycles
demonstrate the process in which a particular type of accounting transaction is
captured in the accounting system of the hotel. In the study of these cycles, we
will encounter the various accounting documents used in a hotel and learn about
the functions of these accounting documents.

Debtors Control Accounts (Accounts Receivables) in a Hotel

Most hotels have two Debtors Control Accounts (Accounts Receivable Control
Accounts).

1. _________ Ledger - Receivable Ledgers for all current in-house guests

2. _________ Ledger - Receivable Ledgers for debtors other than in-house

guests
eg. Corporate Companies, Travel Agents, Credit Card Companies

Sales Cycle (Rooms Division)

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This cycle illustrates how the hotel accounts for the revenue from the sale of
hotel rooms. It begins from the point when the guest checks in to when the
revenue is posted to the general ledger.
(A general ledger is a collection of accounts that record transactions according to
account names.)
From the illustration below, we will see:
1. How this transaction is recognized.
2. At which point is the accounting entry put through.
3. What the accounting entry is.

Sales Cycle (Rooms Division)

1 2 6 7
Guest checks Room folio is Room Revenue Accumulated Room
in created captured in Daily Revenue posted to
Sales Journal General Ledger at
the end of month

3 4 5
Night Audit System looks for System post in
is run folio with valid Room Rate into
occupied room Room folio
status #

Source Document # Accounting Entry

Room folio – serves as an invoice + Guest Ledger
for in -house guests
+ Room Revenue

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The Sales Cycle for Rooms Division can be divided into three sections:

Sales Cycle (Rooms Division) Key Concerns about Controls

Guest Arrival Registration Controls

(Check completeness of guest
registration and appropriateness of room
charges )

Occupancy Occupancy Controls

(Check completeness and accuracy of
billing)

Guest Departure Departure Controls

(Assure promptness and completeness of
billing)

Note that the summation (total) of all room folios makes up your Guest Ledger
total.

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Sales Cycle (F&B Division)

This cycle illustrates how the hotel accounts for the revenue from the food &
beverage sales. It begins from the point when the guest orders the food or
beverage item to when the revenue (from the sale of the food/beverage) is
posted to the general ledger.

Sales Cycle ( F&B Division)

3@ 3a
Sales Cycle
F&B check
for Room
settled to Room
Division
Folio
House Guest

1 2# Accounting Entry
Revenue is #
Guest orders food
or beverage items charged on + F&B Revenue

F&B check
@
+ Cash/City Ledger/
Guest Ledger
Non-house Guest 4@
F&B check settled
by cash/credit card/
city ledger

6
5 Accumulated daily
F&B Revenue F&B Revenue posted
captured in Daily to General Ledger at
Source Document s Sales Journal the end of the month
F&B check – invoice
Credit Card imprint
Room Folio

An interesting point to note is that when a guest orders the food or beverage
item, it is not known at this point how he is going to settle the bill. He could either
settle it by:
1. cash
2. credit card, or
3. signing it to his room - ie. settled to his room folio (guest ledger)

If an F&B outlet is using Point-of-Sale systems, when the waiter keys in the order
of the food/beverage item, only one side of the accounting has taken place. The
charging of the revenue on a F & B check (bill) – ie. Only one leg of the
Accounting Entry is put through first (as seen in box 2 #).

The other leg of the entry cannot be recorded as we do not know the settlement
mode yet. Only when the guest settles the bill, can the cashier put through the
debit entry (as seen in boxes 3@ or 4@).

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Hotel’s In-house Credit and Collection Policies

Please refer to Topic 4: Working Capital

Provision for Bad Debts (or doubtful debts)

 A bad debt is an accounts receivable that is considered to
be_______________.

 Any firm that gives credit will often experience bad debts losses regardless of
the effectiveness of its credit control.

 In the world of accounting, the industry adopts a general Principle of

Conservatism (or prudence).
ie. accounting professional should be cautious or prudent in recognizing and
reporting transactions and profits. This is because accounting information
is relied on by the public for decision making. This principle calls for
recognizing expenses as soon as possible, but delaying the recognition of
revenues until they are ensured.

 As accounts receivable are known to be uncollectible only in future periods

and we know there is always a risk of bad debts, it will be prudent to recognize
the bad debt expense in the period when ______________________. This
means that there is a need to estimate the amount of debts that might go bad
and make a ________________for it.

 The amount to be provided can be determined by identifying debtors which are

considered doubtful of collection ie. specific provision.

In the balance sheet, the provision for bad debts account will appear
immediately below accounts receivable

Example:
Accounts receivable $ 200,000
Less: Provision for bad debts 4,000
Net accounts receivable $ 196,000 How to
interpret this?

Interpretation:
To report accounts receivable at the end of period to be $200,000 will not
be accurate or prudent as there will be bad debts. It will be more prudent
to report that accounts receivable is $196,000 at the end of the accounting
period recognizing that we have made an estimated provision of $4,000 for
bad debts.

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SALES SYSTEMS
Introduction
Although most restaurateurs view point-of-sales systems as a product of
computer age, it is more accurate to describe them as systems designed to
perform historical manual controls more effectively through the use of computer
technology.

1. Manual system
The principal element in the manual systems is the use of duplicate / triplicate
_________________________.

Details recorded on a captain’s order are:

 Details of customers’ orders
 Table number
 Number of guests
 Server’s Number or server’s initial
 Number of guest checks

Customer’s order taken on

3 Copies of Captain’s Order

Kitchen Cashier Serving Station

To prepare the
To prepare the ________________ Used to monitor if all
_______________ in detail for items ordered have
presentation to the been
_______________
_______________ _______________

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Figure A: Manual System

Customer’s orders

captured in
Captain’s Order

Kitchen
to cook

Customers Prints check

Ideally, at the end of the month, the kitchen copy of the order can be matched
with the F&B guest check. This will compare what is being cooked and served
(based on kitchen’s copy of captain’s order) with the revenue that is being
collected (based on the F&B check). Any discrepancy will indicate that food is
cooked and served but revenue is not captured.

Weaknesses of the manual system:

 Does not ensure that _______ customer’s orders are charged as
revenue.
 Does not ensure that ___________ prices are used.
 Transactions may not be captured on a ____________ basis.

2. Initial Pre-checking System

The customer orders and pays for the food order. With the receipt or F&B check,
the customer will then proceed to the respective food station to obtain their food.

This system is based on the concept that a _____________ must be rung up in

order to initiate the order.

This system is usually by canteens or cafeterias.

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Weaknesses of the Pre-Checking system:

 The ordering of the food takes place sequentially, ie. only one customer can
be served at any one time.
In the normal restaurant situation, many waiters can take simultaneous orders
from various customers at any one time. This pre-checking system
___________ down the service process considerably.

 Customers need to queue to make their food orders. This is

_______________ in a full service 5 star hotel restaurant. Furthermore, any
subsequent food orders require the customers to queue again.

3. Computerised Point-of Sale Systems

Computer systems that begin recording sales transactions at the point of sale are
known as Point-Of-Sale systems. Some of the more common systems are
MICROS, Squirrel and Remanco.

The introduction of computerised Point-Of-Sale (POS) system was a major

development for the hotel and restaurant industry.

Figure B: POS System

Customer’s orders

………………...
………………

Kitchen
to cook

Cashier
Customers prints check

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Features of POS

1. Order-Entry Terminals
The most common of which are _________________________ terminals
located at selected locations easily accessible to the servers.

The customised screens guide the server through the input process. The
essential information inputs are the:
 location or _________ number of the customer
 number of ___________ being served
 menu items ___________
 identity of the __________

The input programme usually provides the ability to put in preparation

instructions (i.e., well done for steak, salad dressings, and condiments
requested, etc.)

Computer cables transmit the orders to the kitchen where they are printed out
at the service line. The sophisticated systems permit transmission to several
locations, that is, hot items to the hot preparation area, salads to the salad
station, and drinks to the bar.

2. Guest Checks and Order Entry Terminals

Prices for all menu items, food and beverage, are stored in
__________________ to be printed on a customer’s check. The check is
assigned a check _____________ at the time of the initial input and can be
_______________ on several occasions because of changes or additions to
the order.

3. Guest Checks and Their Settlement

Settlement is usually done by an assigned cashier. If it is settled by the guest
charging the F&B check to his room, the cashier will then post (transfer) the
charge to his room folio (bill) ie. _____________ ledger which will be settled
when the guest checks out.

At the end of the shift, the cashier prints a report indicating which checks are
still ________________ (unsettled). After all checks are settled, the cashier
can print a settlement report which shows an analysis of the total sales and a
detailed breakdown of the settlement. This enables the cashier to
___________ the total cash and charges before submitting them to the main
cashier.

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4. Management Reports and Internal Controls

(A) Revenue Analysis

Revenue analysis is the most direct product of the system. It is the breakdown
of sales by ___________ (food, liquor, wine, tax, gratuities) and by
___________, which is then fed into the accounting system of the hotel.

This information should also be used to provide a daily food and beverage
report, which shows daily and cumulative information on food and beverage
revenue, ___________ of covers, average ____________ etc.

(B) Employee Productivity

This report allows management to evaluate the productivity of
individual employees with information relative to

 ___________ of covers
 ___________ check
 total sales
 the ability to promote higher sales with appetisers, desserts, or
beverages.

(C) Inventory Control

Since the POS system specifically identifies each item sold, both food and
beverage, this information can provide a full analysis of all inventory
_________________.

The ingredients and the quantities used in each ___________ are fed into
the computer. At the end of a day and on a cumulative basis, a report can be
produced in which the ingredients of each food or beverage menu item are
multiplied by the number sold to produce the total inventory consumption
recorded in the system.

This report can be produced in ____________ as well as _____________ by

also feeding the unit costs into the programme.

A ______________ of the consumption reflected by the report against

____________ physical consumption (opening inventory plus purchases
minus closing inventory) will disclose whether all product usage is being
_______________ recorded and whether or not there are physical inventory
_________________.

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Obviously, this report has a higher degree of accuracy in the

______________ area than in the food area, due to variances in preparation
methods, recipe mix, and product yield in the cooking process is _______ as
exact as in the mixing of drinks. Nevertheless, the same principles apply.

(D) Cost Control

POS system extract cost from recipes linked to charged items hence potential
cost (also known as standard cost) is captured. ____________ cost is
compared with _______________ cost (standard cost) - the variance should
be investigated.

Advantages of POS
 all _____________ are charged as charging initiates the order process
 valid __________ are used
 inventory control are ___________ to selling activities
 transactions are captured on a ___________ basis

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Appendix A
Guest Ledger & City Ledger

Hotels generally keep accounts receivable in 2 separate ledgers:

Guest Ledger City Ledger

Owing by guests currently staying in Owing by any parties, other than in-
Nature
the hotel (ie. in-house guests) house guests

In the front office In the accounting department

Where is it
(in the form of room folios - room
maintained?
invoices)

Charges incurred by the guests (eg.
Example
daily room charge, meals at hotel’s
restaurants, etc) which he signs to
his room
 Credit card companies (for guests
who pay by credit cards)
 Corporate accounts (for guests
whose expenses are paid by their
companies)
 Travel agents
 Banquet accounts

Period of Normally very short - usually only Enjoys longer credit privileges
Credit one to a few days

Transferring Upon check-out, if the guest pays by credit cards, the guest ledger account is
from Guest settled. However, the amount is now payable by credit card companies to
Ledger to City the hotel. This amount owing is now transferred to the city ledger.
Ledger

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