Financial Accounting For Hotels 9781259004940

Table of contents :
Title
Contents
1. Overview of Financial Accounting
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAPs)
Illustrations
Objective Type Questions
Review Questions
Exercises
2. Proof of Transactions, Nature and Usage
Receipt
Voucher
Cheque
Review Questions
Exercise
3. Books of Accounts—Journal
Illustrations
Objective Type Questions
Review Questions
Exercises
4. Books of Accounts—Ledger
Illustrations
Objective Type Questions
Review Questions
Exercises
5. Books of Accounts—Subsidiary Books
Illustrations
Objective Type Questions
Review Questions
Exercises
6. Bank Reconciliation Statement
Illustrations
Objective Type Questions
7. Trial Balance
Illustrations
Objective Type Questions
Review Questions
Exercises
8. Final Accounts
Illustrations
Objective Type Questions
Review Questions
Exercises
9. Accounting Systems in Hotels
UNIFORM SYSTEM OF HOTEL ACCOUNTING (USHA)
Illustrations
Objective Type Questions
Review Questions
Exercises
VISITOR’S TABULAR LEDGER (VTL)
Illustrations
Objective Type Questions
Review Questions
11. Accounting Reports and Formats
Objective Type Questions
Review Questions
12. Internal Check, Internal Control, Internal Audit and Mechanized Accounting
Mechanized Accounting
Objective Type Questions
Review Questions
Index

Citation preview

Financial Accounting for Hotels

About the Authors Prasanna Kumar J.P. is a Post Graduate in Commerce from Rani Durgavathi Vishwavidyalaya

P

Marketing of Hospitality and Tourism Services published by

Linda Nalini Daniel

Mruthyunjaya V. Pagad,

Financial Accounting for Hotels Prasanna Kumar J.P. Professor and Head, Department of Management Studies, M.S. Ramaiah College of Hotel Management, Bangalore

Linda Nalini Daniel Lecturer, M.S. Ramaiah College of Hotel Management, Bangalore

Mruthyunjaya V. Pagad Assistant Professor, M.S. Ramaiah College of Hotel Management, Bangalore

Tata McGraw Hill Education Private Limited NEW DELHI McGraw-Hill Offices New Delhi New York St Louis San Francisco Auckland Bogotá Caracas Kuala Lumpur Lisbon London Madrid Mexico City Milan Montreal San Juan Santiago Singapore Sydney Tokyo Toronto

iv

Contents

Tata McGraw-Hill Published by the Tata McGraw Hill Education Private Limited, 7 West Patel Nagar, New Delhi 110 008. Financial Accounting for Hotels Copyright © 2012 by Tata McGraw Hill Education Private Limited. No part of this publication may be reproduced or distributed in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise or stored in a database or retrieval system without the prior written permission of the publishers. The program listings (if any) may be entered, stored and executed in a computer system, but they may not be reproduced for publication. This edition can be exported from India only by the publishers, Tata McGraw Hill Education Private Limited. ISBN (13 digit): 978-1-25-900494-0 ISBN (10 digit): 1-25-900494-5 Vice President and Managing Director: Ajay Shukla Head—Higher Education Publishing and Marketing: Vibha Mahajan Publishing Manager—B&E/HSSL: Tapas K Maji Deputy Manager (Sponsoring): Amit Kumar Associate Acquisition Editor: Piyali Ganguly Executive (Editorial Services): Yogesh Kumar Senior Production Manager: Manohar Lal Senior Production Executive: Atul Gupta Marketing Manager—Higher Education: Vijay Sarathi Assistant Product Manager: Daisy Sachdeva Graphic Designer (Cover Design): Meenu Raghav General Manager—Production: Rajender P Ghansela Manager—Production: Reji Kumar Information contained in this work has been obtained by Tata McGraw-Hill, from sources believed to be reliable. However, neither Tata McGraw-Hill nor its authors guarantee the accuracy or completeness of any information published herein, and neither Tata McGraw-Hill nor its authors shall be responsible for any errors, omissions, or damages arising out of use of this information. This work is published with the understanding that Tata McGraw-Hill and its authors are supplying information but are not attempting to render engineering or other professional services. If such services are required, the assistance of an appropriate professional should be sought. Typeset at Tej Composers, WZ 391, Madipur, New Delhi 110 063 and printed at A.P. Offset Pvt. Ltd., 25/487, Zulfe Bengal, Dilshad Garden, New Delhi-110095 Cover Printer: A.P. Offset RCXCRRXHRQYAL

Foreword Financial Accounting for Hotels

Dr. Shaji Thomas

Preface

Financial Accounting for Hotels,

Acknowledgements

viii

Preface

Prasanna Kumar J.P. Linda Nalini Daniel Mruthyunjaya V. Pagad

Brief Contents About the Authors Foreword Preface

1. 2. 3. 4. 5. 6. 7. 8. 9.

Overview of Financial Accounting Proof of Transactions, Nature and Usage Books of Accounts—Journal Books of Accounts—Ledger Books of Accounts—Subsidiary Books Bank Reconciliation Statement Trial Balance Final Accounts Accounting Systems in Hotels

11. Accounting Reports and Formats 12. Internal Check, Internal Control, Internal Audit and Mechanized Accounting Index

ii v vii

1 21 29 55 75 119 137 162 226 307 326 341

Contents About the Authors Foreword Preface Brief Contents

ii v vii ix

1. Overview of Financial Accounting 2 2 3 3 5 7

1

s)

8

9 10 12 13 Illustrations 15 Objective Type Questions 16 Review Questions 18 Exercises 19

2. Proof of Transactions, Nature and Usage 21 22 Receipt 24 Voucher 24 25 26 27

21

xii

Contents

Cheque 28 Review Questions 28 Exercise 28

3. Books of Accounts—Journal

29 31 33

Illustrations 33 Objective Type Questions 49 Review Questions 50 Exercises 50

4. Books of Accounts—Ledger 55

55 56

56 Illustrations 59 Objective Type Questions 70 Review Questions 71 Exercises 71

5. Books of Accounts—Subsidiary Books 77 79 80 82 84 87 Illustrations 88 Objective Type Questions 109 Review Questions 109 Exercises 110

75

6. Bank Reconciliation Statement

119 119

120 Illustrations 122 Objective Type Questions 132 Review Questions 133 Exercises 133

Contents

7. Trial Balance

xiii 137

137 138 140 142 Illustrations 142 Objective Type Questions 156 Review Questions 157 Exercises 158

8. Final Accounts

162 162 164 166 166 166 168 168 168 168 172 174

Illustrations 175 Objective Type Questions Review Questions 210 Exercises 211

209

9. Accounting Systems in Hotels 226

226 227 ) 228 231

Illustrations 260 Objective Type Questions Review Questions 275 Exercises 275

275

xiv

Contents

290 290 291 294 ) 295 297 298 299 301 302 Illustrations 303 Objective Type Questions Review Questions 306

305

11. Accounting Reports and Formats 307 Objective Type Questions 324 Review Questions 324

307

12. Internal Check, Internal Control, Internal Audit and Mechanized Accounting 326 326 330 332 335 Objective Type Questions 339 Review Questions 340

326

Index

341

Overview of Financial Accounting

1

Chapter

1

Overview of Financial Accounting

Learning Objectives

This chapter would help the reader to understand: The meaning, objectives, attributes, advantages and limitations of accounting The various accounting concepts and conventions, including generally accepted accounting principles (GAAPs) The users of accounting information The relationship between accounting and other disciplines Types of accounts and their respective rules of debit and credit Like a studious student who is always anxious to know about the results of the examination, a businessman is also very anxious to know the progress of his business at frequent intervals. The dealings that a businessman has with bankers, customers, suppliers, investors, shareholders, etc. are called transactions. Transaction is an event, the recognition of which gives rise to an entry in the accounting records. Some examples of transactions are given below: Started business with cash ` 10,000 Paid into bank ` 5000 Purchased vegetables from M/s Telavalla ` 5000 Sold food for cash ` 2000 Paid electricity bill ` 500 Paid rent ` 1000 Received interest on deposit from bank ` 100

2

Financial Accounting for Hotels

Memory has its own limitations. Hence, it becomes necessary for a businessman to keep a proper and systematic record of his business transactions in a set of books. MEANING OF BOOKKEEPING

Bookkeeping is the art and science of recording transactions into a set of related books. This systematized procedure of writing into the books enables easy access to information regarding the activities of the business concerned. According to Kohler (1926)1, Bookkeeping is “the process of analysing, classifying and recording transactions in accordance with a preconceived plan”. A businessman would like to know from time to time and also at the end of each period of operation several things that would help him in handling the business in a more viable manner. Identifying the areas in which expenses should be controlled, where revenues can be increased, etc., is possible with bookkeeping. The following are also possible with bookkeeping records:

(c) If the businessman wants to sell his business, the buyer would like to know the real value of the business.

SYSTEMS OF BOOKKEEPING

There are different systems to record the business transactions. Some of them are cash system, single-entry system and double-entry system. Cash System: According to this system, only cash receipts and payments are recorded. It is not a complete system as the non-cash transactions are not recorded under this system. Single-Entry System: In this system, cash and personal items of the transactions are recorded. It is method. Double-entry Bookkeeping: Every business transaction has a two-fold aspect—receiving aspect and giving aspect. To record these two aspects, a book of account, called Ledger, has been designed accordingly. The left side of an account is called the debit side and the right side the credit side. The receiving aspect of the transaction is entered on the debit side and the giving aspect on the credit side. It is this recording of the two-fold effect of every business transaction that has given rise to the term double-entry. The process of recording the dual aspect of the business transaction is called double entry bookkeeping. Mr. Luca Pacioli developed the double entry system in 1494 in Italy. 1

Kohler, E.L. (1926), Principles of Accounting, A.W. Shaw Company, Chicago.

Overview of Financial Accounting

3

The advantages of double entry system are as follows: (b) There is a complete record of transactions. (c) It is easy to check the accuracy of accounts.

(f) (g) (h) (i)

Control is possible as complete details are available. Comparative study is possible. Helps management in decision making. There is less scope for fraud.

ACCOUNTING

Public Accountants). ACCOUNTING SYSTEMS

Every business transaction is an economic activity that involves money. These transactions are to be recorded for future reference. This activity of recording transactions is called bookkeeping. It is

as investors, employees, lenders, suppliers and trade creditors, customers, government and its agencies, and public. Management accounting is an accounting system in which the management

Objectives of Accounting

The following are the objectives of accounting: (a) To maintain records of the business: Owing to the limitations of human memory, it is number. (b)

The chief objective of accounting is to ascertain the net result of the day-to-day transactions for a period.

(c) has to prepare the Balance Sheet by listing the assets, liabilities and capital. (d) To make information available to various groups and users: Another function of interested parties such as owners, investors, creditors, employees, government, research scholars, etc.

4

Financial Accounting for Hotels

Attributes of Accounting

The attributes of accounting are as follows: (a) Financial transactions: Accounting records only those transactions and events which are in terms of money and will not be recorded. (b) Recording: Accounting is considered an art of recording business transactions in a systematic way in the Journal. (c) Classifying: It is the process of grouping of transactions or entries of similar nature at one place by opening accounts in the Ledger. (d) Summarizing: understandable and useful to management and other interested parties by preparing Final Accounts (Trading and P (e) Analysis and interpretation: The analysis of accounting statements will help the management to judge the performance of business operations and for preparing future plans. The results of analysis and interpretation are communicated to the proprietor and other interested parties such as creditors, investors, employees, etc. Advantages of Accounting

The advantages of accounting are as follows: (a) Assistance to management: It provides information to the management to help them do (b) Replacement of memory: No businessman can remember everything about his business; hence it is necessary to maintain a record of business transactions. (c) Comparative study: (d) Settlement of taxation liability: If accounts are maintained properly, income tax or sales tax assessment becomes easy. (e) Evidence in court: Systematic record of transactions is often treated by courts as good evidence. (f) Sale of business: If a person wants to sell his business, then the accounts maintained will facilitate the ascertainment of the proper purchase price. (g) Assistance to an insolvent person: In case a person becomes insolvent, he has to provide explanations wherever required. Proper accounting records will help him in this. Limitations of Accounting

The limitations of accounting are as follows: (a) Financial accounting is not fully exact as there various estimations are made in calculating (b) Financial accounting does not indicate what the business will realize if sold as most of the assets are not meant to be sold.

Overview of Financial Accounting

5

(c) Financial accounting does not give information about all the aspects of the business, such as the relations with workers, popularity of goods produced, quality and caliber of the management. (d) Sometimes, accounting statements are drawn up wrongly as different methods are followed, for example valuing closing stock. ACCOUNTING CONCEPTS

has been developed in the theory of accounting. This concept is applied to ensure and assess if the accounts portray the activities of the business accurately. To support the application of the “true and fair view”, certain concepts and conventions are adopted to ensure that accounting information is presented accurately and consistently. Accounting concepts are the assumptions made while recording the various transactions into books of accounts. A business house must necessarily keep a systematic record of its day-to-day

shareholders, creditors, employees, government and the public. The accounting practice is based on certain standard concepts, which enable accountants to convey meaningful information to all stakeholders. These concepts are as follows. Business Entity Concept

Under the business entity concept, an accounting entity is held to be “separate and distinct from its owners”. In other words, the business and its owners are considered two separate and distinct entities. All business transactions are recorded in the books from the point of view of the business, and not from the point of view of the proprietor. This convention seeks to ensure that private transactions and matters relating to the owners of a business are segregated from transactions that relate to the business. The proprietor is treated as a creditor to the extent of capital. Going Concern Concept

The underlying assumption in the going concern concept is that the undertaking or the institution period of time and transactions are recorded from this point of view. Accountants assume, unless there is evidence to the contrary, that a company is not going bankrupt. This has important implications for the valuation of assets and liabilities. Money Measurement Concept

The money measurement concept implies that only those transactions and events are recorded in accounting which can be expressed in monetary terms. Accountants do not account for items unless prepared to pay something for them) include things like workforce skill, morale, market leadership, brand recognition, quality of management, etc. In other words, an event, however important it may

6

Financial Accounting for Hotels

be to the business, will not be recorded unless its monetary effect can be measured with a fair degree of accuracy. Accounting Period Concept

known as the accounting period, is usually the calendar year (January 1 to December 31) or the month or less, while others may have longer terms. The Companies Act, 1956 has set a maximum limit of 15 months for the accounting period. Thus, for reporting purposes, the entire life of the accounting period, usually for one year, i.e., from 1st April to 31st March every year. Dual Aspect Concept

According to the dual aspect concept, every business transaction will have a double effect. Hence, at any point of time, the assets of the business will be equal to its liabilities and capital. Accounting Equation

Assets = Equities (Contributions) Assets = C

(d) Additional loans (increases outside liability) (e) Disposing of assets (reduces assets) of funds. These funds can be put to any of the following uses: (a) Purchasing of assets (increase in assets) (b) Cash balances (increase in assets) (d) Clearing liabilities due (decrease in liabilities)

of funds. The sum of the sources of funds equals the sum of the uses of funds. Thus, the dual aspect of accounting means that This is the fundamental accounting equation.

Overview of Financial Accounting

7

Matching Concept

The matching principle provides the guidelines as to how the expense be matched with the concept, the expenses incurred in the production of goods and services should be matched with losses for a particular accounting period. Accrual Concept

According to the accrual concept, all expenses are paid only after the expenditure is incurred or provided for. Cost Objectivity Concept

The cost objectivity concept holds the view that accounting should be free from personal bias. all accounting transactions should be evidenced and supported by business documents, like cash memos, invoices, vouchers, etc. The transactions are recorded at the amounts actually involved. For instance, a piece of land may have been purchased at ` 1,50,000, whereas the company considers it to be worth ` 3,00,000. The land is recorded in the books of accounts at ` 1,50,000 actual amount involved. Since this amount would have been mutually agreed upon by both the parties involved in the transaction, it is an objective valuation. Realization Concept

Accounting records transactions from the historical perspective, i.e. it records transactions that have already occurred. It does not attempt to forecast events; this prevents the business from

Historical Record Concept

In the historical record concept, it is assumed that only after an event happened, its entry would be made in the books of account. ACCOUNTING CONVENTIONS

Accounting conventions are those habits or customs or practices followed in the process of accounting. These are discussed in the following sections. Consistency

The consistency principle holds that accounting procedures or practices should remain the same (consistent) from one year to another. Transactions and valuation methods are treated the same way from year to year, or period to period (e.g. writing off depreciation). Users of accounts can,

8

Financial Accounting for Hotels

accounting policies are changed, companies are required to disclose this fact and explain the handle subsequent events of that type the same manner. For instance, suppose it provides for depreciation through the straight-line method, it will follow that method in the subsequent years

Conservatism

It is a practice followed in accounting where all anticipated losses are given importance rather than anticipated gains. According to this concept, revenues should be recognized only when they are realized, while expenses should be recognized as soon as they are reasonably possible. For ` 10,000. Until the payment is that the customer has lost his assets and is likely to default the payment, the possible loss is

Materiality

possible bad debt worth ` 100. Full Disclosure

of the entity. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAPs)

Accounting principle means rules of action or conduct or basis of conduct or practice. GAAPs are general laws or rules, which are used as a guide to action in accounting. They include the time. Thus, the purpose of these broad basic rules is to guide accountants in recording and reporting GAAPs guide the accounting profession in the choice of accounting techniques and in the are simply guidelines to action and may change overtime. They are not immutable laws like those

Accounting principles originate form problem situations such as changes in the law, tax

Overview of Financial Accounting

9

or procedures are tried. Through comparative use and analysis, one or more of these techniques are judged most suitable, obtain substantial authoritative support and are considered generally accepted accounting principles. Accounting Principles Board of USA states: GAAPs incorporate the consensus at a particular time as to which economic resources and assets and liabilities should be recorded, when these changes are to be recorded, how the assets and liabilities and changes in them should be measured, what information should be disclosed and

USERS OF ACCOUNTING INFORMATION

It is easy to assume that the only users of accounting information are shareholders, since it is a requirement of company law that shareholders must receive periodic accounting statements. However, in reality, there are many users of accounts. The main user groups and examples of their areas of interest in accounts are given in Table 1.1. Table 1.1 Investors

Users of Accounting Information

Investors are concerned about risk and return in relation to their investments. They require information to decide whether they should continue to invest in a business. They also need to be able to assess whether a business will be able to pay dividends, and to measure the investor is therefore: — Information about growth—sales, volumes — Investment (amounts invested, assets owned) — Business value (share price) — Comparative information of competitors

Lenders

Banks and loan stockholders who lend money to a business require information that helps them determine whether loans and interest will be paid when due. The key accounting information for lenders is therefore: — Security of assets against which the lending may be secured — Investment requirements in the business

Creditors

Suppliers and trade creditors require information to help them understand and assess the short-term liquidity of a business. Will the business be able to pay short-term debt when it falls due? Creditors will, therefore, be looking for information on: — Management of working capital — Payment policy

Contd.

10

Financial Accounting for Hotels

Debtors

Customers and trade debtors require information regarding the ability of the business

the business for certain products or services. Customers will be particularly interested in: — Sales growth — New product development — Investment in the business (e.g. production capacity) Employees

Employees (and organizations that represent them, e.g. trade unions) require information information about employment prospects and the maintenance of pension funding and senior management!. Employees will, therefore, look for information on: — Levels of investment in the business — Overall employment data (numbers employed, wage and salary costs) — Status and valuation of company pension schemes/levels of company pension contributions

Government

There are many government agencies and departments that are interested in accounting order to levy and collect corporation tax. Customs and Excise need accounting information to verify Value Added Tax (VAT) returns; local governments need similar information to levy local taxes and rates. Various regulatory agencies (e.g. the Competition Commission and the Environment Agency) need information to support decisions about takeovers and grants, for example.

Analysts analyse the competitive performance of a business and its sector. Much of this is provided by the detailed accounting disclosures that are required by authorities such the London Stock Exchange. However, additional accounting information is usually provided to analysts via

Public at large activities and performance of businesses, will also require accounting information.

RELATIONSHIP BETWEEN ACCOUNTING AND OTHER DISCIPLINES

Accounting is closely related with several other disciplines and thus to acquire a good knowledge in accounting, one should be conversant with the relevant portion of such disciplines. Accounting and Economics

Accounting overlaps in many aspects. There are some differences between economists and accountants regarding the concept of income and capital. Accountants developed the valuation,

Overview of Financial Accounting

11

measurement and decision making techniques which may owe to the economic theorems for origin, but these are moulded in the work environment and suitably tempered with reference to relevance, macro level, accounting provides the data base over which the economic decision models have been developed; micro-level data arranged by the accounting system is summed up to get macrolevel data base. Developing systems of recording, classifying and summarizing transactions and events, harmonizing the systems by uniform rules and communicating the data are essentially non-overlapping areas of accounting. Accounting and Statistics

In accounts, all values are important individually as they relate to business transactions, whereas statistics is concerned with the typical value, trend over a period of time or the degree of variation over a series of observations. Accounting records are historical in nature, generally take a shortview is taken for the purpose. The functional relations showing mathematical relations of one variable with one or more other variables are based on statistical work. These relations are used widely in making cost or price estimates for some estimated future values assigned to the on statistical methods, which help in averaging them over a period of time. Statistical methods are helpful in developing accounting data and in their interpretation. Regression analysis is very useful in forecasting, budgeting and cost control. Accounting and Mathematics

The knowledge of arithmetic and algebra is a prerequisite for accounting computations and measurements. Calculations of interest and annuity are the examples of such fundamental uses. Mathematical techniques are used in computing depreciation, installments in hire-purchase, etc. With the advent of the computer, mathematics is becoming a vital part of accounting. Econometrics, Operations Research Techniques, etc. are used for developing decision models for the users of accounts. Graphs and charts are used for communicating accounting information. Accounting and Law

There is a close relationship between accounting and law where transactions with suppliers and customers are governed by the Contract Act, the Sale of Goods Act, the Negotiable Instruments Act, etc. The Companies Act and the Partnership Act control the companies and partnership organizations, respectively. Accounting and Management

A large portion of accounting information is prepared for management decision making. Although management relies on other data sources, accounting data are used as basic source documents. In the management team, an accountant is in a better position to understand the data requirements and use such data for managerial decision making.

12

Financial Accounting for Hotels

ACCOUNTING TERMINOLOGY

Assets: Assets are the belongings or possession of a business organization. Business transaction: It is an exchange of goods or services for value. Capital: Capital is the initial amount contributed by the proprietor along with the surpluses or reserves accumulated. Cash transactions: It is a transaction where cash payment or receipt is made immediately. Creditor: Creditor is a person to whom the business owes something of value. Credit transactions: It is a transaction where cash payment or receipt is postponed for a future date. Current assets: Current assets are assets which are short-term and not permanent in nature. Examples: Cash in hand, cash at bank, bills receivable, debtors, stock-in-trade. Current liabilities: Liabilities which have to be settled within a short duration, say, within six months to one year. Examples: Creditors, outstanding expenses, received in advance incomes, bank overdraft. Debtor: Debtor is a person who owes something of value to another. Discount: When customers are allowed any type of deduction in the prices of goods by the businessman, it is called discount. Drawing: It is the amount of money or the value of goods which the proprietor takes for his domestic or personal use. Expense: Expense is the amount spent in order to produce and sell the goods and services, which produce the revenue. Fixed assets: Fixed assets are those assets which are acquired with a long-term view or are of capital nature. Income: The difference between the revenue and the expense is called income. Liabilities: Liabilities are the debts of a business owed to outsiders. Examples: Long-term liabilities, short-term liabilities (current liabilities). Long-term liabilities: Liabilities that are to be settled over a longer duration, say, more than one year. Examples: Debentures, loans (secured), mortgage loans. Loss: Revenue: Revenue is the amount which, as a result of operations, is added to the capital.

Overview of Financial Accounting

13

ACCOUNT

An account is a summarized record of business transactions affecting one person, one kind of property and one class of expenses/losses or incomes/gains. Accounts

achieve the desired results. There are Personal A/c, Real A/c and Nominal A/c (Figure 1.1). Accounts

Impersonal A/c

Personal A/c

Relates to persons, e.g. debtors, creditors, and capital A/c of the proprietor

Which are not personal?

Nominal A/c

Real A/c

Relates to the assets of the firm, e.g. land, building, investment, and cash

Figure 1.1

Relates to expenses, losses, gains, revenue, e.g. sales A/c and interest A/c

Types of Accounts

Personal Account

Personal account is an account of individual persons, association of persons like partnership A/c as it is an amount given by Examples: The Oberoi A/c; The Lalit Ashok A/c, Bangalore University A/c, Udhay A/c. Real Account

Real account is an account of properties belonging to or possessed by any individual or organizations, which are tangible or intangible assets.

14

Financial Accounting for Hotels

Examples: Land and Buildings A/c, Kitchen Equipment A/c, Laundry Equipment A/c, Furniture A/c, Cash A/c, Bank A/c, Goodwill A/c, Patents A/c, Copyrights A/c, Patterns A/c, etc. Nominal Account

A nominal account is an account which consists of expenses/losses and incomes/gains. It is also Examples: Salary A/c, Rent A/c, Discount A/c, Commission A/c, Carriage A/c, Postage A/c, Printing A/c, Telephone Expenses A/c, Laundry Expenses A/c, etc. Rules of Debit and Credit for all the Types of Accounts European Rules of Debit and Credit Credit the giver Credit what goes out Credit incomes/gains

American Rules of Debit and Credit Account

Debit

Credit

Assets

Increases

Decreases

Liabilities

Decreases

Increases

Capital

Decreases

Increases

Expenses

Increases

Decreases

Income

Decreases

Increases

Double Entry System

For every transaction, there are two elements, which is either debit or credit. (a) Mr. X commenced a restaurant business with cash ` 10,000— Here, cash is the receiving element and as per the real A/c rule debit what comes in, we have to debit cash A/c. Mr. X is the giving element and as per the personal A/c rule credit (b) Paid salaries to waiters ` 500— Here, salary is an expense and as per the nominal account rule, expenses are to be debited. Cash is going out, hence it should be credited as per the rule of real account credit what goes out.

Overview of Financial Accounting

15

ILLUSTRATIONS

1. Show the effect of following transactions on Accounting Equation: (i) Started hotel business with cash ` 50,000 (ii) Salaries paid ` 2000 (iii) Wages outstanding ` 200 (iv) Prepaid insurance ` 700 (v) Interest due but not paid ` 100 (vi) Rent paid in advance ` 150 (Assets: ` 48,000; Liabilities: ` 300; Capital: ` 47,700) Solution: Capital

+

Liabilities

=

Assets

50,000

—

=

50,000 (Cash)

48,000 (– salaries)

—

=

48,000 (– salaries)

47,800 (– o/s wages)

200 (o/s wages)

=

48,000 (Cash)

47,800

200 (o/s wages)

=

47,300 (Cash)

=

700 (p/p insurance)

200 (o/s wages)

=

47,300 (Cash)

100 (o/s interest)

=

700 (p/p insurance)

200 (o/s wages)

=

47,150 (Cash)

47,700 (– o/s interest)

47,700

100 (o/s interest)

700 (p/p insurance) 150 (p/p rent)

2. Show the Accounting Equation on the basis of the following transactions and present a Balance Sheet: (i) Mohan commenced pastry confectionary business ` 70,000 (ii) Purchased pastry ingredients on credit ` 14,000 (iii) Withdrew for private use ` 1700 (iv) Ingredients purchased for cash ` 10,000 (v) Paid wages to bakers ` 300 (vi) Paid to creditors ` 10,000 (vii) Sold pastry products on credit for ` 15,000 (viii) Sold confectionery products for cash (cost price was ` 3000) ` 4000 (ix) Purchased baking oven for ` 500 (Assets: ` 73,000; Liabilities: ` 4000; Capital: ` 69,000)

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Financial Accounting for Hotels

Solution: Capital

Liabilities

=

Assets

70,000

—

=

70,000 (Cash)

70,000

14,000 (Creditors)

=

70,000 (Cash)

=

14,000 (ingredients)

=

68,300 (Cash-drawings)

=

14,000 (ingredients)

=

58,300 (Cash-purchase)

=

24,000 (ingredients)

=

58,000 (Cash-wages)

=

24,000 (ingredients)

=

48,000 (Cash-creditors)

=

24,000 (ingredients)

=

48,000 (Cash-creditors)

=

9000 (ingredients)

=

15,000 (Debtors)

=

52,000 (Cash-creditors)

=

6000 (ingredients)

=

15,000 (Debtors)

=

51,500 (Cash)

=

6000 (ingredients)

=

15,000 (Debtors)

=

500 (Oven)

68,300 (– Drawings)

68,300 (–Drawings)

68,000 (–Wages)

68,000 (– Wages)

68,000 (–Wages)

69,000 (–Wages)

69,000 (–Wages)

+

14,000 (Creditors)

14,000 (Creditors)

14,000 (Creditors)

4000 (Creditors)

4000 (Creditors)

4000 (Creditors)

4000 (Creditors)

Objective Type Questions 1. State what type of accounts are the following: (a) Goods Account (b) Interest Paid Account (c) Ravi Brothers Account

Overview of Financial Accounting

17

(d) Capital Account (e) Cash Account (f) Salaries Account (h) Building Account (i) Equipment Account (j) Postage Account (k) Sale of Rooms Account (l) Purchase of Provisions Account (m) Bank Account (n) Discount Allowed Account (o) Depreciation Account 2. From the alternatives given in the brackets, against each of the following, pick out the correct one:

(b)

(iii) (i) (ii) (iii) ( iv)

A/c, Buildings A/c) Real Account—(Wages to Stewards A/c, Interest A/c, Furniture A/c) Goods A/c—(Nominal, Real, Personal) Capital A/c—(Real, Personal, Nominal) Electric lighting A/c—(Personal, Real, Nominal) Discount A/c—(Nominal, Real, Personal)

necessary: (a) Furniture and Fixtures A/c

Personal A/c

(c) Travelling Expenses A/c (d) Cash A/c (e) Rent and Rates A/c

Nominal A/c Personal A/c Real A/c

4. Match the following: (a) (b) (c) (d) (e) (f)

A Real A/c is credited Personal A/c is debited Nominal A/c is credited Real A/c is debited Personal A/c is credited Nominal A/c is debited

(i) (ii) (iii) (iv) (v) (vi)

B for what is received when something is going out When a person is the giver when there is a gain for expenses when a person is the receiver

18

Financial Accounting for Hotels

5. Name the account to be debited and credited in each of the following transactions: (a) Received cash from Ahmed (b) Paid cash into bank (c) Bought of Rehman, Groceries and Vegetables (d) Purchased fruits for cash (e) Paid for carriages (f) Purchased furniture from Bright Furniture Mart (g) Paid wages to cooks (h) Paid rent to landlord (i) Received commission from Suresh (j) Sold meals to Ramesh

Review Questions 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

What is a business transaction? What is bookkeeping? What is accounting? What is meant by single entry system? What is double entry system? What is an account? State the different types of accounts with examples. What are the advantages of double entry system? State and explain the rules of debit and credit according to European system of accounting. What are the objectives of accounting? equation. user of accounts.

accounting and management accounting. 14. E = A – l. What does this equation imply? Can it be an equation? (iii) Mathematics, (iv) Law, and (v) Management. 16. How is the going concern concept and the accruals concept related? 17. What do you understand by GAAPs? 18. Explain the following terms: (a) Debtor (b) Creditor (c) Assets (e) Capital (f) Drawings (g) Revenue (i) Income (j) Losses

(d) Liabilities (h) Expense

Overview of Financial Accounting

19

Exercises 1. (a) A starts a business and invests ` 50,000 on January 1, 2005. On December 31, 2005, his assets are ` 65,000 and liabilities are ` 6000. Find out the amount of capital on (b) In respect of the above, if the proprietor had invested ` 5000 as additional capital and withdrawn ` 2000, what will be your answer? (c) If A had withdrawn from his business ` case. 2. State the effect of the following transactions on assets, liabilities and capital using the accounting equation: (i) Started business with cash ` 60,000 (ii) Rent Received ` 2000 (iii) Accrued interest ` 500 (iv) Commission received in advance ` 1000 (v) Amount withdrawn ` 5000 3. Develop accounting equation from the following transactions:

(i) Mohan started a restaurant business with cash (ii) Purchased groceries for cash (iii) Purchased vegetables, fruits, meat products on credit from Ram (iv) Sold food (cost ` 10,000) for (v) Bought Kitchen equipment on credit from Kitchenite Ltd. (vi) Paid cash to Ram (vii) Salary paid

` 50,000 30,000 20,000 12,000 2000 15,000 1000

4. Anil had the following transactions in an accounting year: (a) (b) (c) (d) (e) (f) (g) (h)

Commenced business with cash ` 50,000 Purchased goods for cash ` 20,000 and on credit ` 30,000 Sold goods for cash ` 40,000 costing ` 30,000 Rent paid ` 500 Rent outstanding ` 100 Bought printer on credit ` 5000 Bought TV for personal use ` 5000 Purchased Computer for cash ` 20,000

Use accounting equation to show the effect of the above transactions on his assets, liabilities and capital.

20

Financial Accounting for Hotels

5. Show the effect of the following transactions on accounting equation: (a) Started business with cash ` 50,000 (b) Salaries paid ` 2000 (c) Wages outstanding ` 200 (d) Prepaid Insurance ` 700 (e) Interest due but not paid ` 100 (f) Rent paid in advance ` 150

2

Chapter

Proof of Transactions, Nature and Usage

Learning Objectives

This chapter would help the reader to understand: The need for proof of transactions Cash bill, invoice, voucher and receipt and their format Debit note, Credit note, Pay-in slip and Cheque and their format Accounting records can be considered valuable only when these are supported with adequate

CASH BILL

22

Financial Accounting for Hotels

SSS SUPPLIERS LTD. Cash Memo No.: 007

Date: 30 Oct. 2007

To Hotel XYZ Bangalore SI. No.

Particulars

Units

Rate

Amount (`)

1

Rice

20 kg

` 25

500.00

2

Oil

10 kg

` 50

500.00

3

Sugar

15 kg

` 20

300.00

TOTAL

1300.00

RECEIVED CASH SIGNATURE

Figure 2.1

Format of Cash Bill/Cash Memo

Seller’s Books: (SSS Suppliers Ltd.)

Journal Entry:

` 1300 ` 1300

Subsidiary Books:

Buyer’s Books: (Hotel XYZ)

Journal Entry:

Subsidiary Books:

CREDIT BILL/INVOICE

` 1300 ` 1300

Proof of Transactions, Nature and Usage

SSS SUPPLIERS LTD. Invoice No.: 007

Date: 30 Oct. 2007

To Hotel XYZ (Your Purchase Order No.: 001) Bangalore (Note: Kindly please pay the bill within 30 days of delivery of goods; Kindly certify receipt of good with a stamp on the invoice) SI. No.

Particulars

Units

Rate

Amount (`)

1

Flour

10 kg

` 25

250.00

2 3

Tea Spices

10 kg 2 kg

` 40 ` 50

400.00 100.00

TOTAL

750.00

*Received contents in good condition as per Invoice Receiver’s Signature

SIGNATURE

Figure 2.2

Format of Credit Bill/Invoice

Seller’s Books: (SSS Suppliers Ltd.)

Journal Entry:

` 750 ` 750

Subsidiary Books:

Buyer’s Books: (Hotel XYZ)

Journal Entry:

Subsidiary Books:

` 750 ` 750

23

24

Financial Accounting for Hotels

RECEIPT

is being paid, the receipt is raised. SSS SUPPLIERS LTD. Receipt No.: 012

Date: 15 Nov. 2007

Received with thanks ` 750 (Rupees Seven Hundred and Fifty Only) towards Invoice No: 007 dated 30 Oct. 2007 from M/s. Hotel XYZ in cash/Bank of India cheque No: 258701 dated 15 Nov. 2007 Cashier for SSS SUPPLIERS LTD.

(Cheques subject to realization)

Figure 2.3

Format of Receipt

Receiver’s Books: (SSS Suppliers Ltd.)

Journal Entry:

` 750 ` 750

Subsidiary Books:

Giver’s Books: (Hotel XYZ)

Journal Entry:

Subsidiary Books:

VOUCHER

therein.

` 750 ` 750

Proof of Transactions, Nature and Usage HOTEL XYZ VOUCHER DATE: 20 Nov. 2007 Received from HOTEL XYZ ` @ ` 20 per liter APPROVED SIGNATURE Authorized Signatory For HOTEL XYZ

Figure 2.4

Format of a Voucher

Giver’s Books (Hotel XYZ)

Journal Entry:

` 500 ` 500

Subsidiary Books: Supply Account. Receiver’s Books: (Milk Vendor)

Journal Entry:

Subsidiary Books:

DEBIT NOTE

` 500 ` 500

25

26

Financial Accounting for Hotels HOTEL XYZ

Debit Note No.: 101

Date: 2 Nov. 2007

To SSS SUPPLIERS LTD. Bangalore (Note: Your account is debited with the following amount for the reasons mentioned herein) SI. No

Particulars

Units

Price

Amounts

Remarks

1 2

Flour Tea

2 kg 1 kg

` 25

` 50

` 40

` 40

bad packing not needed

TOTAL

` 90 Signature

Figure 2.5

Format of Debit Note

Giver’s Books (Hotel XYZ)

Journal Entry:

` 90 ` 90

Subsidiary Books:

CREDIT NOTE

Proof of Transactions, Nature and Usage

27

SSS SUPPLIERS LTD. Credit Note No.: 001

Date: 2 Nov. 2007

To HOTEL XYZ Bangalore (Note: Your account is credited with the following amount for the reasons mentioned in your Debit Note No: 101) SI. No

Particulars

Units

Price

Amounts

1 2

Flour Tea

2 kg 1 kg

` 25 ` 40

` 50 ` 40

TOTAL

` 90 Signature

Figure 2.6

Format of Credit Note

` 90 ` 90

Journal Entry:

Subsidiary Books:

PAY-IN SLIP

counterfoil, which is signed by the cashier and returned to the depositor, as receipt (Figure 2.7). Bank of India, Sanjaynagar, Bangalore

Bank of India, Sanjaynagar, Bangalore

COUNTERFOIL

PARTICULARS OF PAYMENT

Received: _______________

In the Current/Saving A/c

Cheque ` _______________

Date: _______

Cash ` _________________

Paid into credit of ___________________

Into Current/Savings A/c No.: ____

the sum of Rupees __________________

Name: ____________________ ` ________________________

in Current/Savings A/c No: _____________ By ________________________________

Figure 2.7

Format of Pay-in Slip

28

Financial Accounting for Hotels

CHEQUE

(Figure 2.8). BANK OF INDIA Sanjaynagar, Bangalore Date: ___________ Pay to _________________________________________ or BEARER Rupees ____________________________________________________ only

Figure 2.8

Format of Cheque

Review Questions

(e) Debit note

Exercise

(c) Debit note

3

Chapter

Books of Accounts—Journal

Learning Objectives

This chapter would help the reader to understand: Meaning of journal Need for journal and its importance Advantages and limitations of journal Concepts and methods of journalizing Types of journal entries

The word ‘journal’ originated from the French word Jour provide a chronological record of transactions in which each transaction is set down in its entirety Book of Original Entry or Book of Prime Entry or Day Book The process of recording a transaction in a Journal is termed Journalizing and the record made in the journal is called Journal Entry Need for Journal

The need for journal arises due to the following reasons:

30

Financial Accounting for Hotels

Importance and Use of Journal

Advantages of Journal

The advantages of the Journal are as follows:

Limitations of Journal

The limitations of the Journal are as follows:

Pro Forma of Journal

1. Date: 2. Particulars: Dr the second line is for the account to be credited, which should be preceded by the word To

Books of Accounts—Journal

31

3. Ref. No.: 4. L/F No.: Ledger folio is the column in which we record the page number of the Ledger 5. Debit Amount: 6. Credit Amount:

Date

Particulars

Ref.

L/F

No.

No.

Debit `

YMD

Debit Element A/c

Dr.

Credit Ps.

`

xxx

To Credit Element A/c

xxx

(Narration)

Figure 3.1

Pro Forma of Journal

ANALYSIS OF BUSINESS TRANSACTION (STEPS FOR JOURNALIZING)

Rules of Debit and Credit for all Types of Accounts European Rules of Debit and Credit

American Rules of Debit and Credit Account

Debit

Credit Decreases

Liabilities

Decreases Decreases Decreases Decreases

Ps.

32

Financial Accounting for Hotels

Transaction

Accounting Elements

Type of A/cs

A/c to be Dr./Cr

Reason for Dr./Cr.

Example

`

Transaction

Accounting Elements

Type of A/cs

A/c to be Dr./Cr

Reason/Rule for Dr./Cr.

Debited material for cash

Journal Entry Date

Particulars

Ref. No.

L/F No.

Debit `

1234

Compound Journal Entries

Ps.

Credit `

Ps.

Books of Accounts—Journal

33

Opening Entry

Opening entries are those entries which begin the new book of account, where all the assets account

POINTS TO BE NOTED WHILE PASSING JOURNAL ENTRIES

withdraws cash or any other thing from the business for his personal use, the two accounts

ILLUSTRATIONS

` ` `

` `

` ` `

` `

34

Financial Accounting for Hotels

Solution: Journal Entries in the Books of Lemon Tree Restaurant Date

Particulars

L/F

Dr. Amt.

Cr. Amt.

2184 2712

` ` `

` `

` `

`

Solution: Journal Entries in the Books of Tamarind Hotels Date

Particulars

L/F

Dr. Amt.

`

Cr. Amt.

Books of Accounts—Journal

Solution: Journal Entries Date June 3

4

11

13

17

27

Particulars

L/F

Dr. Amt.

Cr. Amt.

35

36

Financial Accounting for Hotels

`

Solution: Journal Entries Date

Particulars

L/F

Dr. Amt.

Cr. Amt.

2

5 7

15

Contd.

Books of Accounts—Journal

37

25

26

28

31

` 2

Discount received

25

Solution: Journal Entries Date

Particulars

L/F

Dr. Amt.

Cr. Amt.

Contd.

38

Financial Accounting for Hotels 2

3

7

15

25 1475 25

To Discount received

31

`

Books of Accounts—Journal

39

Solution: Journal Entries Date

Particulars

L/F

Dr. Amt.

Cr. Amt.

2

3

4

225 225 24

145 5

allowed to him) 28

225 215

from him)

Contd.

40

Financial Accounting for Hotels

`

Solution: Journal Entries Date

Particulars

L/F

Dr. Amt.

Cr. Amt.

2

4

Contd.

Books of Accounts—Journal 5

8

14

21

22

25

27

28

`

41

42

Financial Accounting for Hotels

Solution: Date

Particulars

L/F

Dr. Amt.

Cr. Amt.

2

3

4

and billing machine) 6

15 15

8

Contd.

Books of Accounts—Journal 15

25

26 25

in full settlement) 31

cash for private use) 31

`

43

44

Financial Accounting for Hotels

Solution: Journal Entries Date

Particulars

L/F

Dr. Amt.

Cr. Amt.

2

3

4

5 To Jaisimha 6

11

14

16

Contd.

Books of Accounts—Journal

45

18

`

in full settlement

685

Solution: Journal Entries Date

Particulars

L/F

Dr. Amt.

Cr. Amt.

July 1

Contd.

46

Financial Accounting for Hotels 1

2

3

5

6

11

12

14

16

23

225 225

24

Contd.

Books of Accounts—Journal

47

26

28 685 15 full settlement) 31

31

` ` ` ` ` ` ` ` Solution: Journal Entries Date

Particulars

L/F

Dr. Amt.

Cr. Amt.

5

Contd.

48

Financial Accounting for Hotels

14

18

22

27

31

` ` ` ` ` ` Solution: Journal Entries Date

Particulars

L/F

Dr. Amt.

Cr. Amt.

5

Contd.

Books of Accounts—Journal

15

21

21

Objective Type Questions

`

`

`

`

`

49

50

Financial Accounting for Hotels

L `

Review Questions

Exercises

Transaction

cash ` cash ` ` ` `

Accounting Elements

Type of A/cs

A/c to be Dr./Cr.

Reason/Rule for Dr./Cr.

Books of Accounts—Journal

Transaction

51

Accounting Elements

Type of A/cs

A/c to be Dr./Cr.

Reason/Rule for Dr./Cr.

Accounting Elements

Type of A/cs

A/c to be Dr./Cr.

Reason/Rule for Dr./Cr.

father-in-law ` and started business bank ` ` ` ` allowed ` ` discount received `

Transaction ` proprietor’s son personal use `

` ` `

for cash)

52

Financial Accounting for Hotels

personal use)

` ` ` ` ` `

Furniture

Furniture

Deepak

` ` ` ` ` ` ` ` ` ` `

Books of Accounts—Journal

53

` ` ` ` ` ` ` ` ` `

`

` ` ` ` ` ` ` ` ` ` ` `

` ` ` ` ` ` accounting elements, type of accounts, account to be debited or credited, and reason for `

54

Financial Accounting for Hotels

` ` ` ` ` ` ` `

Books of Accounts—Ledger

4

Chapter

55

Books of Accounts—Ledger

Learning Objectives

This chapter would help the reader to understand: The meaning of ledger and its need The distinction between journal and ledger Posting of journal entries to the ledger

The ledger is a book in which various individual accounts are kept. It contains the accounts for all the persons with whom the business deals, for all the assets held by the business, for all the a transactions. The ledger is a derived or secondary record, because the entries in the ledger are made from the entries in the journal. It is also called Secondary Book, , and . NEED FOR LEDGER

As transactions recorded in the journal are in the order of date, transactions of a similar nature may be found on different pages of the journal. As a result, one cannot easily know the net effect of similar transactions on any particular date with the help of journal. To know easily the exact position of each account on any particular date it becomes necessary to classify the various transactions recorded in the journal and bring transactions of similar nature together. For the purpose of grouping similar transactions in one place and knowing easily the exact position of each account on any date, the ledger has been introduced.

56

Financial Accounting for Hotels

Object of Preparing an Account

The object of preparing an account is to know the balance of the account, which may be the amount which we owe to others or amount to whom we owe something, expenses of the business, incomes of the business, assets balance, liabilities balance, capital balance, etc. DISTINCTION BETWEEN JOURNAL AND LEDGER

The journal and the ledger are the most important books of the double entry mechanism of accounting and are indispensable for an accounting system. The following differences are worth noting:

3. The journal, as a book of source entry, gets greater importance as legal evidence than the ledger.

5. The process of recording in the journal is called Journalizing the ledger is known as Posting. Ledger Accounts on the Basis of Accounting Equation

Since expenses and incomes affect capital, there are two more accounts that form the part of capital: carrying on business operations.

PROFORMA OF A LEDGER Name of Account

Date

Particulars

J/F No.

Amount

Date

Particulars

The two sides of an account is called debit side and credit side.

J/F No.

Amount

Books of Accounts—Ledger

57

Rule of Entering in the Ledger

While transferring an entry from a journal to the ledger, the debit amount from the journal is

According to this format, the columns will contain the information as given below. An account is debited or credited according to the rules of debit and credit already explained in respect of each category of account. : The name of the item is written at the top of the format as the title of the Dr./Cr. Dr. means the Debit side of Date: Year, month and date of transactions are posted in chronological order in this column. Particular: credit side of the account. It records the page number of the original book of entry on which relevant transaction Amount: entered in the amount column of the original book of entry. Example

On 1st April 2006, bought raw material for cash ` Journal Entry: Date

Particulars

No.

2006 April 1

1234

L/F No.

Debit

Credit

`

Ps.

5000

00

`

Ps.

5000

00

Raw Material A/c

Date 2006 April

Particulars

J/F No.

Amount

5000

Date

Particulars

J/F No.

Amount

58

Financial Accounting for Hotels

Cash A/c

Date

Particulars

J/F No.

Amount

Date

Particulars

2006 April 1

J/F No.

Amount

5000

Balancing an Account

At the end of each month or year or on any particular day, it may be necessary to ascertain the balance in an account. To ascertain the balance in any account, we have to total the two sides and it will be a credit balance. In the other case, it will be debit balance. The credit balance is written equal, then the totals are written on two sides opposite each other with one line above and two

accounts and real accounts are balanced. Nature of Balances of Different Kinds of Accounts

1. A personal account may show a debit balance or credit balance. A debit balance in a

what he has received from the business. Therefore, the business owes the amount of the

account is an asset account and all asset accounts are debit balances.

to the goods may represent opening stock, closing stock, purchase returns, sales returns, purchase and sales.

indicates the amount of expenses or losses incurred by the business, A credit balance in the

Books of Accounts—Ledger

59

ILLUSTRATIONS

` 20,000 ` 1800 ` 1500 Solution: Capital A/c Date

Particulars

L/F

2002 Dec. 31 31 31

Amt. 1800 1500 16,700 20,000

Date

Particulars

L/F

2002 Oct. 1

Amt. 20,000

20,000 2003 Jan. 1

16,700

`

Solution: Cash A/c

Date

Particulars

L/F

Amt. 40,000 24,000

64,000 42,000

Date

Particulars

L/F

Amt. 20,000 400 600 1000 42,000 64,000

60

Financial Accounting for Hotels

` 40,000 ` 10,000 ` 8000 ` 14,000 ` 1000 Solution: Kitchen Equipment A/c Date

Particulars

L/F

Amt.

Date

Particulars

40,000 8000

L/F

Amt. 10,000 14,000 1000 23,000 48,000

48,000 23,000

` `

` `

3

Sold to Sharma

8

Sold to Zahir

18

` `

`

` 800, Stock ` ???

1000 500

20

Received from Sharma by cheque Allowed him discount Sold food to Sharma

2000 50 800

25

Sold to Zahir

1000

Solution: Journal Entries Date 2003 May 1

Particulars

L/F

Dr. Amt.

Cr. Amt.

300 7000

Contd.

Books of Accounts—Ledger Zahir

Dr.

Sharma

Dr.

800 4000 1500 1000 2000 900 9700

2

900 900

3

Sharma

Dr.

1000 1000

4

1200 1200

8

Zahir

Dr.

500 500

15

1500 1500

18

2000 50 To Sharma

20

Sharma

2050

Dr.

800 800

20

150 150

25

31

Zahir

Dr.

1000 1000 300 300

61

62

Financial Accounting for Hotels

Cash in Hand A/c Date

Particulars

J/F

2003 May 1

Amt.

Date

300

2003 May 31

Particulars

J/F

Amt. 300

300

300

Cash at Bank A/c Date

Particulars

J/F

2003 May 1 May 18

To Sharma

Amt.

Date

Particulars

J/F

7000

2003 May 15

1500

2000

May 20

150

May 31

7350

9000 June 1

Amt.

9000

7350

Zahir A/c Date

Particulars

J/F

Amt.

2003 May 1

800

May 8

500

May 25

1000

Date

Particulars

J/F

2003 May 31

2300

2300 June 1

Amt.

2300

2300

Stock A/c Date 2003 May 1

Particulars

J/F

Amt.

Date

4000

2003 May 31

4000 June 1

4000

Particulars

J/F

Amt. 4000 4000

63

Books of Accounts—Ledger

Sharma A/c Date

Particulars

J/F

Amt.

Date

2003 May 1

1500

2003 May 18

May 3

1000

May 20

800

Particulars

J/F

2000 50

May 31

1250

3300 June 1

Amt.

3300

1250

Bills Payable A/c Date

Particulars

J/F

Amt.

Date

Particulars

J/F

2003 May 1 2003 May 31

Amt. 1000

1000 1000

1000 June 1

1000

Govind A/c Date

Particulars

J/F

Amt.

Date

Particulars

J/F

2003 May 15

1500

2003 May 1

2000

May 31

1400

May 2

900

2900

Amt.

2900 June 1

1400

Ram Lal A/c Date

Particulars

J/F

Amt.

Date 2003 May 1

Particulars

J/F

Amt. 900

Contd.

64

Financial Accounting for Hotels May 4

2003 May 31

1200

2100 2100

2100 2100

June 1

Capital A/c Date

Particulars

J/F

Amt.

Date

Particulars

J/F

2003 May 1 2003 May 31

Amt. 9700

9700 9700

9700 June 1

9700

Purchase A/c Date

Particulars

J/F

Amt.

2003 May 2

900

May 4

1200

Date

Particulars

J/F

2003 May 31

2100

2100 June 1

Amt.

2100

2100

Sales A/c

Date

Particulars

J/F

Amt.

Date

Particulars

J/F

Amt.

2003 May 3

1000

May 8

500

Contd.

Books of Accounts—Ledger

2003 May 31

May 20

800

May 25

1000

3300 3300

3300 June 1

3300

Discount Allowed A/c Date 2003 May 18

Particulars

J/F

To Sharma

Amt.

Date

50

2003 May 31

Particulars

J/F

50

50 June 1

Amt.

50

50

Rent A/c Date

Particulars

J/F

2003 May 20

Amt.

Date

150

2003 May 31

Particulars

J/F

150

150 June 1

Amt.

150

150

Salary A/c Date 2003 May 31

Particulars

J/F

Amt.

Date

300

2003 May 31

300 June 1

300

Particulars

J/F

Amt. 300 300

65

66

Financial Accounting for Hotels

Trial Balance as on 1st June 2003 Accounts

Dr. Amt.

Cr. Amt.

7350 4000 1250 1000 1400 2100 9700 2100 3300 50 150 300 2300 Total

17,500

17,500

5. From the following information, show the account of Ms. Anitha in the books of Ms. Vanitha. `

2005

8 10 14 31

Returned her goods for Sold her goods worth Received goods returned by her Settlement is made with discounting amount of

1000 7000 250 250

Solution: In the Books of Vanitha Anitha’s A/c Date 8.3.05

Particulars

J/F

Amt. 1000

Date 1.3.05

Particulars

J/F

Amt. 10,000

Contd.

Books of Accounts—Ledger

67

10.3.05

7000

5.3.05

5000

31.3.05

7000

14.3.05

250

31.3.05

To Discount received

250 15,250

2002 June 1 3

7 12 15 19

15,250

Sold goods to him Received from him on account and allowed him discount Returned to him goods worth Received from him cash Sold goods to him worth He returned goods worth

` 1000 450 50 50 300 500 100

Solution: Anil’s A/c Date

Particulars

J/F

Amt.

Date

Particulars

1.06.02

1000

3.06.02

450

7.05.02

50

3.06.02

50

15.06.02

500

5.06.02

500

22.06.02

200

12.06.02

300

19.06.02

100

28.06.05

200

30.06.02

150

1750

`

2001 3

Returned goods to Anil

Amt.

1750

150

1.07.02

J/F

2000

68

Financial Accounting for Hotels

10 14 17

and he allowed discount Sold goods to Anil Anil returned goods Received from Anil Allowed him discount

200 8000 200 7700 100

And he allowed discount

300

Solution: In the Books of Sunil Anil’s A/c Date

Particulars

J/F

Amt.

Date

Particulars

J/F

Amt.

3.12.01

2000

1.12.01

22,000

6.12.01

19,800

14.12.01

200

200

17.12.01

7700

6.12.01

To Discount Received

10.12.01

8000

25.12.01

14,700 To Discount Received

31.12.01

100 19.12.01

19,000

300 4000 49,000

49,000 4000

1.01.02

8. Record the following transactions in the personal account of Mr. Karim and balance at the end of the month: 2002 Nov. 1 4 12 14 18 21 30

Sold goods to Karim Received from Karim Allowed him discount Karim bought goods Received from Karim Sold goods to Karim Received from him Allowed discount Received from him in full settlement

` 5420.50 5150.38 270.12 6000 2000 10000 3960 40 9800

Books of Accounts—Ledger

69

Solution: Karim’s A/c Date

Particulars

J/F

Amt.

Date

Particulars

J/F

Amt.

1.11.02

5420.50

4.11.02

5150.38

12.11.02

6000.00

4.11.02

270.12

18.11.02

10,000.00

14.11.02

2000.00

21.11.02

3960.00

21.11.02

40.00

30.11.02

9800.00

30.11.02

200.00

21,420.50

21,420.50

2002 Sep. 1 4 15

Sold goods to Raman Received from Raman cash Raman bought goods

` 5420 5150 6000

13 20 31

Sold goods to Raman Received from Raman cash Received from Raman

10,000 4000 10,000

Solution: Raman’s A/c Date

Particulars

J/F

Amt.

Date

Particulars

J/F

Amt.

1.09.02

5420

4.09.02

5150

15.09.02

6000

28.09.02

2270

30.09.02

4000

11,420

11,420

1.10.02

4000

20.10.02

4000

13.10.02

10,000

31.10.02

10,000

14,000

14,000

70

Financial Accounting for Hotels

10. Write up the account of Mr. Rajesh from the following transactions: `

2003

12 17 19 24

Returned goods to him Sold goods to him Received goods returned by him Rajesh paid us cash

400 1600 200 1000

Solution: Rajesh’s A/c Date

Particulars

J/F

Amt.

Date

Particulars

2.01.03

5000

1.01.03

8000

12.01.03

400

19.01.03

200

17.01.03

1600

24.01.03

1000

31.01.03

400

31.01.03

1800 9200

Objective Type Questions 1. Fill in the blanks:

2. State whether the following statements are true or false:

` ` `

Amt.

9200 1.02.03

to rent account.

J/F

1800

Books of Accounts—Ledger

71

Review Questions 1. 2. 3. 4.

What is a ledger? What is meant by posting? What is a ledger folio? What is meant by balancing of account?

6. 7. 8. 9.

State the types of ledger. Nominal accounts are not balanced. Why? What are the differences between a journal and a ledger? What are the advantages and disadvantage of a ledger?

Exercises 1. Journalize the following transactions in the journal of Kamath Restaurant, post them to his 2005 7 9

` 15,000 ` 2000 ` 12,500 ` 500

Sold food for cash to Mr. Anand Sold food on credit to Mr. Hiten

` ` `

trade discount

300 1000 1000

of Ram. 2005 Dec. 1 2 13 24 28 30

Opening debt of Shyam to Ram Shyam purchased goods from Ram Ram sold goods to Shyam Shyam returned goods to Ram Ram received goods returned by Shyam Shyam paid to Ram ` 10,000 and discount allowed

` 5000 ` 40,000 ` 50,000 ` 20,000 `

1000

3. From the following information, show the account of Mr. Q as it would appear in the ledger ` 16,400 ` 4000 ` 660

72

Financial Accounting for Hotels

` `

` 12,400 and discount allowed by him

7500 100

4. From the following information, show the account of Suresh as it would appear in the ledger of Mukesh: 2000 5 10 15

Sold goods to him for He returned goods for He paid ` 6400 and allowed him discount ` 12,000 from him Returned goods for ` 1000 to him ` 4950 and was allowed discount

22

` 7300 ` 4300 ` 200 ` 100

`

50

2004 6

Sold goods

17

Received commission

26

Received from Vikas

` 11,000 ` 6000 ` 4000 ` 1500 ` 100 ` 800 ` 3500 ` 8200 ` 1400

6. From the following information, prepare the linen account in the ledger of Srinagar Hotel for the month of March 2007: ` 700 had been brought down from the last month.

McDowell Laundry

Charges to Guests

Date

Amount `

Date

Amount `

March 2

1280

March 2

890

March 4

2350

March 5

2891

March 6

4560

March 7

3458

March 7

5670

March 9

5679

March 8

7890

March 12

2137

March 10

2340

March 15

4321

Books of Accounts—Ledger March 12

4580

March 18

4567

March 15

8900

March 21

9876

March 18

9675

March 24

7654

March 20

4576

March 25

5432

March 30

9806

73

7. From the information given below, you are required to reconstruct certain nominal accounts of a restaurant, and to show clearly in each case the amount of expenditure to be transferred

Account

Closing Balance `

` 21,500

`

`

`

350

`

`

` 11,250

`

`

`

`

5800

8. A business, which commences on January 12,000, receives a rate demand for ` 2400 from is paid on January 10th. On 6th April, a further demand for ` received and paid on 20 April. On 5th October, a demand for another ` 3000 is received to cover the period October 2000 You are required to: Write up the Rates Account as it would appear in the books of business at 31st December 9. The monthly transactions for February 2005 are as follows: 1

Received cheque from Debtors

` 1,75,000 ` 65,000 ` 1,50,000 ` 45,000 ` 37,500 ` 12,000 ` 78,000 ` 42,000

74

Financial Accounting for Hotels

On 1st January 2005, after nine months of trading, the hotel had the following balances in their books: Debit ` Debtors Freehold premises

Credit `

2,00,000 21,50,000 ?

Stock

87,500 9,62,500 7,75,000

Wages

4,62,500

Sales

28,87,500 3,55,000

Other overheads

5,15,000

Drawings

3,17,500 1,87,500

Journalize the transactions for February, post them to the ledger and prepare a fresh Trial 10. Journalize the following transactions and post them to the respective ledgers: 2009 April 1 2

Started restaurant business with cash Deposited into bank

` 20,000 2000

5

Sold food for cash

5000

8

Sold food to Raman

1500

Received from Raman Withdrew from bank for personal use

1000 500

16 20

Books of Accounts—Subsidiary Books

5

Chapter

75

Books of Accounts—Subsidiary Books

Learning Objectives

This chapter would help the reader to understand: The meaning, types and advantages of subsidiary book Types of discount Ruling of subsidiary books and posting of subsidiary book entries to ledger accounts The objects and types of cash book The treatment of contra entries in three-column cash book The imprest system of petty cash book The process of journalizing and then posting into individual ledgers is burdensome and lengthy. on time and get the reports from the same monitor of business. Hence, the division of processes has been achieved using subsidiary books, also called special journals or subdivided journals. Subsidiary books are also known as special journals. Subsidiary books are those books of primary entry where one journal is maintained for one particular type of transactions. These are different types of subsidiary books (Figure 5.1): 1. 2. 3. 4. 5. 6. 7.

Purchase Book Sales Book Purchase Returns Book Sales Returns Book Cash Book Petty Cash Book Bills Receivable Book

To record all credit purchase of goods To record all credit sale of goods To record all return of goods outward To record all return of goods inward To record all receipts and payments of cash To record small cash payments To record all bills and promissory notes received by the businessman from his customers

76

Financial Accounting for Hotels

8. Bills Payable Book

To record all bills accepted and promissory notes given by the businessman to his creditors To record all transactions that cannot be entered in any one of the above books

9. Journal Proper

Ledger

Principle Books

Simple Cash Book

Cash Book with Discount Columns

Cash Book with Bank Columns Financial Books

Cash Books Petty Cash Book

For credit purchases For credit sales For purchases returns

Subsidiary Book

Sales Book Purchase Returns

For sales returns

Sales Returns Book

For bills received

Bills Receivable Book

For bills accepted

Bills Payable Book

For transactions not recorded elsewhere

Figure 5.1

Purchase Book

Journal Proper

Types of Subsidiary Books

The advantages of subsidiary books are as follows: 1. Division of work: The accounting work may be divided among a number of clerks. 2. As the work of maintaining different subsidiary books is

Books of Accounts—Subsidiary Books

77

3. Saving time: As the work is divided, various accounting works can be undertaken simultaneously, which, in turn, saves time. 4. Since separate books are kept for each class of transaction, the information relating to each class of transactions will be available at one place. Errors and frauds can be checked by the use of various subsidiary 5. books. PURCHASE BOOK

Purchase book or purchase journal or invoice book is journal in which only credit purchase of goods dealt in or of the materials and stores required in an organization is considered. The source from the supplies of the goods. Entries are made with the net amount of the invoice. Cash Discount and Trade Discount

Cash discount is the discount granted by the creditor to the debtor for encouraging prompt payment of cash. Trade discount is the discount granted by the wholesaler to the retailer to encourage the latter to make bulk purchases. The differences between trade and cash discount are shown in Table 5.1. Table 5.1

Distinction between Trade Discount and Cash Discount

Trade Discount

Cash Discount

1. It is allowed on a certain quantity being purchased.

1. It is allowed on payment being made before a certain date.

2. It is not entered in the ledger accounts.

2. A ledger account has to be maintained for cash discount in the ledger.

3. It is deducted from the invoice.

3. It is not deducted from the invoice.

Figure 5.2 shows a format of purchase day book. Date

Particulars

Invoice No.

L/F

Amount `

YMD

Supplier

xxx

Total

xxx

Figure 5.2

Format of Purchase Day Book

Ps.

78

Financial Accounting for Hotels

Example

1 April 2006 6 April 2006

Bought rice on credit from Raghav & Sons ` 1500 Bought sugar on credit from Abid & Bros. ` 2500 Purchase Day Book

Date

Particulars

2006 April 1 6

Invoice No.

L/F

Amount `

Ps.

Raghav & Sons (Rice)

1500

00

Abid & Bros. (Sugar)

2500

00

4000

00

Total

Purchases Account as ‘To Sundry Creditors” (Figure 5.2) and the individual entries are posted Figure 5.3). With this, the purchase department would know at the end of the day itself what the total credit purchase was. In the General Ledger Purchase A/c Date

Particulars

2006 April 6

To Sundry Creditors

J/F

Amt.

Date

4000

2006 April 7

Particulars

J/F

4000

4000 2006 April 8

Amt.

4000

4000

In the Personal Ledger Raghav & Sons Date

Particulars

J/F

Amt.

Date 2006 April 1

2006 April 7

Particulars

J/F

Amt. 1500

1500 1500

1500 2006 April 8

1500

Books of Accounts—Subsidiary Books

79

Abid & Bros. Date

Particulars

J/F

Amt.

Date

Particulars

J/F

2006 April 6 2006 April 7

Amt. 2500

2500 2500

2500 2500

2006 April 8

SALES DAY BOOK (JOURNAL)

All credit sales of merchandise are recorded in the sales journal. The format of the sales journal is similar to that of the purchases journal explained earlier (Figure 5.2). The source documents for The date of sale, invoice number, name of the customer and amount of the invoice are recorded in the sales journal. Periodically, at the end of each month the amount column is totaled and posted to

Date

Particulars

Invoice No.

L/F

Amount Ps.

` YMD

Cusotmer

xxx

Total

xxx

Figure 5.3

Format of Sales Day Book

See the example illustrated below. Example

1 April 2006 Sold food on Credit to Ramesh 6 April 2006 Sold beverages on credit to Ajay

` 500 ` 250

Sales Day Book Date

2006 April 1

Particulars

Ramesh (Food)

Invoice No.

L/F

Amount `

Ps.

500

00

Contd.

80

Financial Accounting for Hotels

2006 April 6

Ajay (Beverages) Total

250

00

750

00

In the General Ledger Sales A/c Date

Particulars

J/F

Amt.

Date

Particulars

J/F

2006 April 6

Amt. 750

750

2006 April 7

750

750 2006 April 8

750

In the Personal Ledger Ramesh Date

Particulars

J/F

2006 April 1

Amt.

Date

500

2006 April 7

Particulars

J/F

500

500 2006 April 8

Amt.

500

500

Ajay Date 2006 April 6

Particulars

J/F

Amt.

Date

250

2006 April 7

250 2006 April 8

Particulars

J/F

Amt. 250 250

250

PURCHASES RETURNS (JOURNAL) BOOK In Purchases Returns book, purchases returns of goods are recorded. Sometimes, goods purchased are returned to the supplier for various reasons such as the goods are not of the required quality, or are defective, etc. For every return, a debit note (in duplicate) is prepared and the original one is sent to the supplier for making necessary entries in his book. The supplier may also prepare a note, which is called the credit note. The source document for recording entries in the purchases return journal is generally a debit note (Figure 5.4). A debit note will contain the name of the party

Books of Accounts—Subsidiary Books

81

(to whom the goods have been returned), details of the goods returned and the reason for returning the goods. Date

Particulars

Debit Note No.

L/F

Amount Ps.

` YMD

Supplier

xxx

Total

xxx

Figure 5.4

Format of Purchase Returns Book

Example

3 April 2006 8 April 2006

Returned rice to Raghav & Sons Returned sugar to Abid & Bros.

` 150 ` 250

Purchase Returns Book Date

Particulars

2006 April 3 8

Debit Note No.

L/F

Amount `

Ps.

Raghav & Sons (Rice)

150

00

Abid & Bros. (Sugar)

250

00

Total

400

00

In the General Ledger Purchase A/c Date

2006 April 9

Particulars

J/F

Amt.

Date

Particulars

2006 April 8

To Sundry Creditors

J/F

Amt. 400

400 400

400 2006 April 9

400

82

Financial Accounting for Hotels

In the Personal Ledger Raghav & Sons Date

Particulars

J/F

2006 April 3

Amt.

Date

150

2006 April 8

Particulars

J/F

150

150 2006 April 9

Amt.

150

150

Abid & Bros. Date

Particulars

J/F

2006 April 8

Amt.

Date

Particulars

250

2006 April 8

J/F

250

250 2006 April 9

Amt.

250

250

SALES RETURNS (JOURNAL) BOOK

Sales Returns Book is used to record the return of goods by customers to the suppliers on credit. On receipt of goods from the customer, a credit note is prepared, like the debit note referred to earlier. The difference between the credit note and the debit note is that the former is prepared by the in duplicate and contains details relating to the name of the customer, the merchandise received recording entries in the sales returns book is generally the credit note (Figure 5.5). Date

Particulars

Credit Note No.

L/F

Amount `

YMD

Cusotmer

xx

Total

xx

Figure 5.5

Format of Sales Returns Book

Example

4 April 2006 Claim for spoilage of food by Ramesh 9 April 2006 Breakage of beverage bottle, claim by Ajay

` 50 ` 25

Ps.

83

Books of Accounts—Subsidiary Books

Sales Returns Book Date

Particulars

2006 April 4 9

Invoice No.

L/F

Amount `

Ps.

Ramesh (Claim for spoilage)

50

00

Ajay (Breakage of beverage bottle)

25

00

75

00

Total

In the General Ledger Sales A/c Date

Particulars

J/F

Amt.

Date

75

2006 April 9

2006 April 4

Particulars

J/F

75

75 2006 April 10

Amt.

75

75

In the Personal Ledger Ramesh Date

Particulars

J/F

Amt.

Date

Particulars

J/F

2006 April 4 2006 April 9

Amt. 50

50 50

50 2006 April 10

50

Ajay Date

Particulars

J/F

Amt.

Date 2006 April 9

2006 April 9

Particulars

J/F

Amt. 25

25 25

25 2006 April 10

25

84

Financial Accounting for Hotels

CASH BOOK

it is made on a monthly basis. This is a very popular book and is maintained by all organizations, account. When a cashbook is maintained, transactions of cash are not recorded in the journal, and no separate account for cash or bank is required in the ledger. Objects of Cash Book

The objects of the Cash Book are to: 1. Find our total cash receipts and cash payments during a given period 2. Ascertain the cash or bank balance without physically counting the sales 3. Verify the cash and bank balance Kinds of Cash Book Single-Column Cash Book (Cash Column Only)

It is a cash book which contains only one amount column only for cash on either side. The format

Single-Column Cash Book Dr. Date

Cr. Particulars

R. No.

L/F

Amount `

Figure 5.6

Date

Particulars

Vr. No.

Ps.

L/F

Amount `

Ps.

Format of Single-column Cash Book

In the debit side of the particulars column, we record the name of the person from whom we received the amount or the name of the income against which we received the amount. In the credit side of the particulars column, we record the name of the person to whom we paid the amount or the name of the expense against which we paid the amount. When cash transactions are entered in the cash book, only one aspect of the transaction is recorded. In order to complete double entry of the transaction, all the items appearing in the cash book should be posted in the respective ledger accounts.

Books of Accounts—Subsidiary Books

85

Double-Column Cash Book (Discount and Cash Columns Only)

It is the same as the simple cash book with an additional column for discount on both debit side

Double-Column Cash Book Dr. Date

Cr. Particulars

R. No.

L/F

Discount

Figure 5.7

Cash

Date

Particulars Vr. No. L/F

Discount Cash

Double-column Cash Book

Usually, cash discount is allowed to customers to pay promptly. Similarly, cash discount is received when the payment is made promptly to suppliers. Cash discounts accompany cash receipts from customers and cash payments to suppliers. Therefore, it is convenient to record discount allowed or discount revived with cash receipt or cash payments. The column on the debit side records the discount allowed to the customer and the column on the credit side records the discount received from suppliers. When the discount column is provided on both sides of the cash book, it is not necessary to open a separate discount account in the ledger because the discount columns will be balanced and the discount columns total on the debit side serves as the discount allowed amount and on the credit side serves as the discount received. These amounts can be straightaway showed in the trail balance. For recording banking transactions, a separate bank account is maintained. Three-Column Cash Book: (Discount, Cash and Bank Columns)

The two column cash book is suited for only to concerns having limited number of banking transactions. In larger businesses however, the transactions related to receipts of cheques and payments by cheques being very large in number, it is very laborious to make two entries in the cash book whenever cheques are received and paid into bank on the same day and payments are made by cheques. Further, opening a separate bank account in the ledger is also tedious and time cash book known as Triple (Three) Column Cash Book, which incorporates the bank column along with discount and cash columns on both sides of the cash book. In this case, no separate bank

Three-Column Cash Book Dr.

Cr.

Date Particulars R. No. L/F Discount Cash Bank Date

Figure 5.8

Particulars Vr. No. L/F Discount Cash Bank

Three-column Cash Book

86

Financial Accounting for Hotels

Contra Entries

Contra entries are the entries that appear on both sides of the same book of account. In the case of three column cash book, there are two types of transactions that give rise to contra entries. Payment of Cash or Cheque Into Bank

Notes: 1. When a cheque is received from a customer and sent to the bank for collection on the same day of its receipt, No contra entry will be passed. The entry will be as follows:

(Being cheque received from a customer & deposited to the bank) 2. When a cheque is received from a customer on one day and deposited to bank on any subsequent day of its receipt, the following entries are to be passed: (a) On the day of receipt of cheque (Cheque received is treated as cash received till it is deposited to bank for collection.)

(b) On the day of deposit of cheque into bank (contra entry will be passed)

Dishonour of Cheques

Sometimes cheques received from a customer, when deposited by the businessman for collection, stoppage of payment by the drawer of the cheque, etc. This is called dishonour or bouncing of cheques. Sometimes when cheques are received, the businessman may have allowed a discount and later the cheque may get dishonoured. In such a case, the following journal entries are to be passed. (a) When a cheque is received and discount allowed

Books of Accounts—Subsidiary Books

87

(b) When the cheque is returned dishonoured (reversal entry to be passed)

PETTY CASH BOOK

Petty cash book is a cashbook maintained by the petty cashier to record small cash payments for a particular period of time. In every organization, a large number of small payments such as conveyance, cartage, postage, telegrams and other expenses (collectively recorded under miscellaneous expenses) are made. These are generally repetitive in nature. If all these payments are handled by the cashier and are recorded in the main cash book, the procedure is found to be very cumbersome. The cashier may be overburdened and the cash book may become very bulky. To avoid this, large organizations normally appoint one more cashier (petty cashier) and maintain a separate cash book to record these transactions. Such a cash book maintained by the petty cashier is called petty cash book. Imprest System

` 2000 is given to the petty cashier at the beginning of a certain period. This amount is called imprest amount on making all small payments out of this imprest amount and when he has spent the substantial portion of the imprest amount, say, ` 1780, he gets reimbursement of the amount spent from the head cashier. Thus, he again has the full imprest amount at the beginning of the next period. The reimbursement may be made on a weekly, fortnightly or monthly basis, depending on the frequency of small payments. (In certain cases, the petty cash system is operated through the main cash book itself. In such instances, the petty cash book is not maintained independently. Analytical Petty Cash Book

The petty cash book generally has a number of columns for the amount on the payment side

is recorded. At the end of the period, all amount columns are totalled. The total amount column shows the total amount spent and to be reimbursed. On the receipt (debit) side, there is only one receipts and payments. Grouping of Expenses

1. Ink, Pad, Paper, Pencil, Pins, etc. 2. Postage, Stamps, Revenue Stamps, Telegram, Envelopes, etc.

1. Printing and Stationery 2. Postage and Telegram

88

Financial Accounting for Hotels

3. Cartage, Coolie, Carriage, Freight, etc. 4. Train fare, Air fare, Bus fare, etc.

3. Cartage and Carriage 4. Traveling Expenses

6. Tips, Refreshments to customers, 6. Sundry Expenses Subscription to magazines, newspaper, etc. The format of analytical petty cash book is given in Figure 5.9.

Figure 5.9

An Analytical Petty Cash Book

ILLUSTRATIONS

1. You are required to prepare a Purchase Book from the following transactions: 2008 100 bags of wheat @ ` 53 per bag 50 bags of rice basmathi @ ` 110 per bag

40 tins oil @ ` 50 per tin 20 tins banaspati oil @ ` 45 per tin

25 bags gram @ ` 48 per bag 40 bags oats @ ` 25 per bag

Ledger Accounts

Sundry Expenses

Travelling and Conveyance

Advertisement

Wages

Analysis of Payments

Coolie

Amt.

Freight and Cartage

Vr.No.

Postage and Telegram

Particulars

Printing and Stationery

Receipt Date

Books of Accounts—Subsidiary Books

89

Solution: Purchases Day Book Date

Particulars

LF

Inv. No.

Amount

1.05.06 100 bags of wheat @ ` 53 = 5300 50 bags of rice @ ` 110

= 5500

9720 3.05.06 40 tins oil @ ` 20 tins banaspathi @ ` 2900 2755 4.05.06 25 bags gram @ ` 40 bags oats @ ` 2200 2090 Total

2. Verma Bros. carry on business as wholesale cloth dealers. From the following, write up Jan. 3

8 15

20

Purchased on credit from Birla Mills 100 pieces long cloth @ ` 30 50 pieces shirting @ ` 50 Purchased for cash from Ambika Mills 50 pieces muslin @ ` 40 Purchased on credit from Arvind Mills 20 pieces coating @ ` 100 10 pieces shirting @ ` 60 Purchased 5 typewriters on credit from ` 1400 each

90

Financial Accounting for Hotels

Solution: Purchases Day Book Date

Particulars

LF

Inv. No.

Amount

3.1.07 100 pieces long cloth @ ` 30 = 3000 50 pieces shirting @ ` 50 15.1.07

= 2500

5500

Arvind Mills 20 pieces coating @ ` 100 = 2000 10 pieces shirting @ ` 60

= 600

Total

120 chairs @ ` 15 per chair 40 tables @ ` 50 per table 10

Sold to Ajit Singh & Sons, Amritsar 150 desks @ ` 22 per desk 160 chairs @ ` 8 per chair

15

Sold to Ideal Furniture House, Patiala 10 sofa sets @ ` 150 each 5 almirahs @ ` 40 each ` 35 each

Solution: Sales Day Book Date

Particulars

1.4.08 120 chairs @ ` 40 tables @ `

LF

Inv. No.

Amount

Books of Accounts—Subsidiary Books 10.4.08 150 desks @ ` 160 chairs @ ` 4351 15.4.08 10 sofa sets @ ` 150 each

= 1500

5 almirahs @ ` 40 each

= 200

` 35 each = 875 2575 Total

dealers in stationery. 2007 July 1 2 10

Sold to Stationery Mart on credit 2 reams white paper @ ` 15 per ream Sold to Puran Chand & Co. 6 dozen sulekha inkpots @ ` 24 per dozen Sold old newspapers for cash ` 12 9 drawing boards @ ` 7 per piece ` 85 each ` 120 per table

Solution: Sales Day Book Date

Particulars

1.07.07

LF

Inv. No.

Amount 30

2 reams of white paper @ ` 2.07.07 6 doz. Inkpots @ `

144

25.07.07 9 drawing board @ ` 7 per piece

63

91

92

Financial Accounting for Hotels 26.07.07 2 Transistors 'Janta Model' @ ` 85 each

170

30.07.07 ` 120 per table

480

Total

237

2008

` 7.50 each 100 copies Business Methods Without Tears ` 5 each ` 7.50 25 copies of Business Methods Without Tears @ ` 5 ` 10

20 copies of Economics @ ` 10 ` 7.50 22

Bought of Rajab Ali, Agra `4

50 copies History of England @ ` 5

`4 Solution: Purchases Day Book Date

Particulars

L/F

Inv. No.

Amount

1.1.08 ` 7.50 = 750 ` 5.00 = 500

1250

Books of Accounts—Subsidiary Books

93

8.1.08 ` 10 = 400 340 22.1.08 `4

400 320

25.1.08 50 copies History of England @ ` 5

250 212.5

Total

Sales Day Book Date

Particulars

L/F

Inv. No.

Amount

2.1.08 ` 7.50 = 180 25 copies of BMWT @ ` 5 = 125

305

12.1.08 20 copies of Economics @ ` 10

200

18.1.08 ` 7.50

150

31.1.08 `4 Total

2009 Jan. 10

25

Returned to Sohan & Sons 1 Rohtas fan 36≤ @ ` 150 Reason–the fan being out of order Returned to Ram & Co. 1 dozen lamp–holders @ ` 20 per dozen Reason–Received in excess of the order

100 755

94

Financial Accounting for Hotels

Solution: Purchases Returns Day Book Date

Particulars

L/F

D.N. No.

Amount

2009 Jan. 10 1 Rohtas fan 36≤ @ ` 150 = 150 135 Jan 25 1 dozen lamp–holders @ ` 20 per doz.

20

Total

155

7. Prepare Sales Returns Book of Shiv Shankar from the following transactions 2008 Feb. 10

20

Rama Stores returned 1 doz. Osram lamps 25 W @ ` 50 per doz. Reason—breakage due to bad packing Sohan Singh & Co. returned 1 Ranjit Fan 48≤ A.C. @ ` 200 Reason—being out of order

Solution: Sales Returns Day Book Date

Particulars

L/F

C.N. No.

Amount

2008 Feb. 10 1 doz. Osram lamps 25 W @ ` 50 per doz.

50

Feb. 20 1 Ranjit Fan 48” A.C. @ ` 200

200

Total

250

8. Prepare Returns Inward and Returns Outward Books from the following transactions: 2008 5 pairs of shoes for being defective @ ` 35 per pair

100 pairs of chappals being not up to the approved sample @ ` 15 per pair

95

Books of Accounts—Subsidiary Books

12 pairs of ladies chappals @ ` 20 per chair

100 pairs of B.S.C. Canvas shoes @ ` 5 per pair

9 pairs sandals @ ` 8 per pair Solution: Purchases Returns Day Book Date

Particulars

LF

D.N. No.

Amount

2008 March 5 100 pairs of chappals@ ` 15 per pair. = 1500 1275 20 100 pairs of B.S.C. Canvas shoes @ ` 5 per pair = 500 425 Total

1700

Sales Returns Day Book Date

Particulars

LF C.N. No. Amount

2008 March 1 5 pairs of shoes for being defective @ ` 35 per pair = 175.00 157.50 12 12 pairs of ladies chappals @ ` 20 per chair = 240 216 24 9 pairs sandals @ ` 8 per pair

72 Total

96

Financial Accounting for Hotels

2006 July 1 5 7 10 15 20 25 30

Purchased goods for ` 10,000 Purchased goods for ` 8000 from Vijay Returned goods worth ` 200 to Vijay Purchased goods worth ` Purchased goods worth ` 15,000 from Anitha Claimed allowances for damages from Anitha ` 500 Purchased furniture for ` 2000 from Anand Purchased goods worth ` 11,000 from Ankush

Solution: Purchases Day Book Date

Particulars

LF

Inv. No.

Amount

2008 July 5 15

8000 Anitha = 15,000 13,500

July 30

= 11,000 9900 Total

Purchases Returns Day Book Date

Particulars

LF

D.N. No.

2008 July 7 July 20

Amount 200

Anitha

500

Total

700

10. Enter the following transactions in proper subsidiary books of Ram for the month of January 2008: 2008 Jan. 1 1 2

Sold goods to Ramesh Bought of Hari Ram Ramesh returned goods

` 525 780 75

Books of Accounts—Subsidiary Books

2 4

Purchased goods from Mangal Returned goods to Mangal

700 100

4 5 6

Sold to Zakir Hussain Zakir Hussain returned goods Sold to Ram Saran

350 4 500

7

Ram Saran returned goods

9

Purchased goods from Raghunath

10

50

Sold to Raja Ram goods

Solution: Purchases Day Book Date

Particulars

LF

Inv. No.

2008 Jan. 1 2

Amount 780 700

Mangal

4

325

9

900 Total

2705

Sales Day Book Date

Particulars

2008 Jan. 1

Ramesh

LF

Inv. No.

Amount 525

2

550

4

Zakir Hussain

350

6

Ram Saran

500

6

300

10

475 Total

2700

97

98

Financial Accounting for Hotels

Purchases Returns Day Book Date

Particulars

04.01.08

LF

D.N. No.

Amount

Mangal

100

8

700 Total

Sales Returns Day Book Date

Particulars

02.01.08

LF

C.N. No.

Amount

Ramesh

75

5

Zakir Hussain

7

Ram Saran

4 50

Total

129

`

2008

3 5

with cash He bought provisions for cash Sold food for cash

8000 5000 100

9

Paid into Bank

3000

16 17

Sold food for cash Paid for stationery

1500 15

22 25 28 30

Paid for advertising Purchased postage stamps Paid rent Paid electricity charges

90 8 100 15

Books of Accounts—Subsidiary Books

99

Solution: Single-Coloumn Cash Book

Date

Particulars

LF

R. No.

2008 April 1 To Capital

Amt. 8000

5 To Sales

100

6

360

16 To Sales 21

Date

Particulars

LF

April 3 By Purchase 9 By Bank

3000

13

215

1500

17 By Stationery

15

680

18 By Furniture

185 90

25 By Postage stamps

8

28 By Rent

100

30 By Electricity charges

15

30

To Balance B

2012

2012

12. Enter the following transactions in Cash Book with discount columns: 2007 Jan. 1 5

Amt. 5000

22 By Advertising

May 1

V. No.

Cash in hand Paid to Ram

` 1500 300

8

Purchased goods

400

16 21

Sold goods Paid to S. Sharma

400 295

25 31

Paid wages Paid to Narayan in full settlement of his account which shows a credit balance of ` 400

50 390

100

Financial Accounting for Hotels

Solution: Double-Coloumn Cash Book

Date

Particulars

R. LF No.

DA Amt. Date

2007 Jan. 1

1500

10

20

16 To Sales

Particulars

LF

V. No.

Jan. 5 By Ram

980

8 By Purchases

400

21 By S. Sharma

Dr.

Amt.

10

300 400

5

25 By Wages

50

31 By Narayan

10

31 25 1445

13. Prepare a Cash Book from the following transactions: 2007 July 1

Balance from last month

390 1445

20 Feb 1

295

` Ps. 6250.00

4 9 10

Received cash from Amar Nath Paid cash for Sundry Trade Expenses Paid for postage

210.50 146.25 4.57

18 20 22

Cash purchases Paid rent Paid Baldev (`

26

Sold goods for cash

807.75

30

Paid for general exp.

26.50

1415.37 450.00

Books of Accounts—Subsidiary Books

101

Solution: Double-Coloumn Cash Book

Date

Particulars

LF

R. No.

DA

2007 July 1

Amt.

Date

Particulars

6250.00 July 3 By Purchases

4 To Amar Nath

210.00

12

113.25 1336.75

26 To Sales

807.75

9 By Sundry Tr. Exp. 10 By Postage

V. No.

Dr.

Amt.

4250.00 146.25 4.57

18 By Purchases

1415.37

20 By Rent

450.00

22 By Baldev

Aug 1

LF

12.50 237.50

23

50.00

28 By Printing

45.61

30

26.50

31 By Household Exp.

100.00

31

1878.70

1878.70

2008 Jan. 1

5

Cash in hand Cash at Bank Received from A

` 567 12,675 790

102

Financial Accounting for Hotels

7 8

Purchased furniture for cash Paid to B by cheque

250 745

13 15

Received from C by cheque and deposited into bank Cash Sales

500 785

17

Purchased a Motor Car by Cheque

22 25 31

Purchased goods for cash Paid Establishment expenses through bank Paid rent in cash

5240

350 450 50

Solution: Three-Column Cash Book

Date

Particulars LF

R. DA Cash Bank No.

2008 Jan. 1 2 To Cash

567 C

5 To A

790

13 To C 785

15 To Cash

C

19 To Bank

C

LF

500

7 By Furniture

250

15 By Bank

5 C

17 1000

V. Dr. Cash Bank No.

C

8 By B 500

15 To Sales

Particulars

12,675 Jan. 2 By Bank 500

10

Date

19 By Cash

745 1000

3

367

C

250

250 Jan. 22 By Purchase

350

By Establishment 25 Exp.

450

31 By Rent

50

31 10 Feb. 1

2392 14,675 242

12,863

242 12,863 8

2392 14,675

Books of Accounts—Subsidiary Books

2008 Jan. 1 2 4 5

103

` 5000 1000 1500

Cash in hand Bank overdraft Paid wages

6

Cash sales Sold goods for cheque which was deopisted in bank on the same day Purchased goods from Hari on credit

7500

8 9

Paid to Hari in full settlement Received from Ram, who owes ` 5000, ` 2000 only on account.

5000 4000 3500

Solution: Three-Column Cash Book . Date

Particulars LF

2008 Jan. 1

R. DA Cash Bank Date No. 5000

3 To Cash

C

4 To Sales

7500

V. Dr. No.

2000

C

2000

7 8 By Hari

14,500

7000

7500

5000

1000 500

3500 7500

5000

500 14,500

7000

16. Enter the following transactions in the cash book with cash and bank columns: 2009 Jan. 1 5

25

Bank

1500

8

Feb. 1

Cash

1000

2 By Wages 3 By Bank

5000

9 To Ram

LF

Jan. 1 2000

5 To Sales

Particulars

Cash in hand Bank overdraft Received a cheque from Ram

800 5700 3250

Paid to Sohan by cheque

2425

Cheque received from Hari

1200

104

Financial Accounting for Hotels

30 31

Rent paid by cheque Bank charges

150 25

Solution: Three-Column Cash Book

Date Particulars

LF

2009 Jan. 1

R. DA Cash Bank No. 800

5 To Ram C

20 To Bank

C

25 To Hari

Particulars

LF

V. Dr. Cash Bank No.

2009 1

3250

7 To Cash

Date

7 By Bank 3250

5700 C

3250

10 By Sohan

2425

250

15 By Ram

3250

1200

20 By Cash

C

28 By Mukesh

250 1200

30 By Rent

150

31 By Bank Charges 31

8550

31

5500 Feb. 1

1050

25 1050 5500

Feb. 1

8550

`

2

Bank balance (Cr.) Cash sales

2575 1570

5

Mohan settled his account for ` 750 by giving a cheque for `

730

10 13

Bought goods and paid by cheque Purchased stationery for

450 75

20

Received a cheque from Prabhu and deposited to bank

31

Paid salary by cheque ` 1000 and rent in cash

1500 150

Books of Accounts—Subsidiary Books

105

Solution: Three-Column Cash Book

Date

Particulars

R. LF No. DA Cash Bank Date

2006 Jan. 1

3 To Cash

1570 C

5 To Mohan 7 To Cash

1500 20

730

C

25 To Bank

1500 C

2575

3 By Bank

C

1500

7 By Bank

C

730

10 By Purchases 730

20 To Prabhu

V. LF No. Dr. Cash Bank

2006 Jan. 1

123

2 To Sales

Particulars

475

450

13 By Stationery

75

18 By Mohan 25 By Cash

20

730

C

475

31 By Salary

31

1500 20

Feb. 1

31 By Rent

150

31

440

5230 440

1000

20 Feb. 1

5230 1500

18. From the following particulars, write cash book of Hari & Sunil: 2007 March 1 3 4 4 5 6 7 8 9 11 14 14 14 14

Cash in hand Bank balance Paid salaries in cash Paid Sathish & Co. by cheque in full settlement of their claim of ` 265 Received from Ram & Mohan, on account cheque Bought goods for cash Cash sent to bank Paid Hari Bros. By cheque (discount allowed ` 3) Received from Mohan Bros. in coin and notes Received from Ramesh & Co. cheque (discount allowed ` 8) Paid wages Cheque from Ramesh & Co. returned dishonoured and bank debits account in respect of bank charges Interest collected by bank Cash sales

` 482 362 220 260 400 25 100 64 150 160 270 2 30 90

106

Financial Accounting for Hotels

Solution: Three-Column Cash Book

Date

Particulars

LF

R. DA Cash Bank No.

2007 March 1

482

5 To Ram & Mohan 7 To Cash

C

9 To Mohan Bros. 8 C

100

6 By Purchase 7 By Bank

200

14 To Sales

90

V. Dr. Cash Bank No. 220 5

C

100 3

15

200

14 By Wages

270

14 By Ramesh & Co.

8

16

366

19. Prepare a Petty Cash Book on the imprest system from the following: ` 2008 Jan.

1 2 2 3 3 4 4 5 5 5 6 6 6 6 6

Received `100 for Petty Cash Paid bus fare Paid carriage Paid for postage & telegrams Paid wages for casual laborers Paid for stationery Paid for Tonga charges Paid for repairs to chairs Bus fare Cartage Postage and telegrams Tonga charges Cartage Stationery Refreshments

162 307

922 1052 307

64

C

14 8

260 25

8 By Hari Bros. 12 By Cash

30

LF

2007 March 4 By Salaries 4 By Sathish & Co.

160

14 To Interest

Particulars

400

150

11 To Ramesh & Co. 12 To Bank

362

Date

0.50 2.00 5.00 6.00 4.00 2.00 15.00 1.00 4.00 7.00 3.00 3.00 2.00 5.00

366

922 1052

Books of Accounts—Subsidiary Books

107

Solution:

1000

Ledger Accounts

Sundry Expenses

Traveling and Conveyance

Advertisement

Wages

Coolie

Amt.

Freight and Cartage

Particulars

Postage and Telegram

Date

Printing and Stationery

Receipt

Vr. No

Analysis of Payments

2008 Jan. 1 To Cash received 2 By Bus fare

5

2 By Carriage

20

3 By Postage & telegrams

50

3 By Wages

60

4 By Stationery

40

4 By Tonga charges

20

5 By Repairs to chairs

20 50 60 40 20

150

5 By Bus fare

10

5 By Cartage

40

6 By Postage & telegrams

70

6 By Tonga Charges

30

6 By Cartage

30

6 By Stationery

20

6 By Refreshments

50

7

5

150 10 40 70 30 30 20 50

405

1000

1000

405

8

595

8 To Cash Received

60

120 90 00 60 00

65

200

`150 as the petty cash imprest on 4th June 2009. ` 4

Wages to casual workers

15

Stationery purchased

10

108

Financial Accounting for Hotels

6

7 8

Sent telegram to H.O. Postage stamps purchased Revenue stamps for payment of wages Repair to typewriter Paid electric lighting bill Wages paid to coolies for shifting furniture, etc. Taxi fare to asst. manager Telegrams sent to different suppliers

4 10 5 4 17 4 5 10

Stationery purchased 4 Refreshments to customers 2 You are required to prepare an Analytical Petty Cash Book under the imprest system. Solution:

1500

Ledger Accounts

Sundry Expenses

Traveling and Conveyance

Advertisement

Wages

Coolie

Amt.

Freight and Cartage

Particulars

Postage and Telegram

Date

Printing and Stationery

Receipt

Vr. No.

Analysis of Payments

2009 June 4 To Cash Received 4 By Tonga Charges 4 By Wages 5 By Bus fare

50

50

150

150

20

20

5 By Stationery

100

6 By Telegram

40

40

100

100

6 By Postage

100

6 By Revenue stamps

50

7 By Repairs to typewriter

40

40

170

170

7 By Electricity bills 8 By Wages

40

8 By Taxi fare

50

8 By Telegrams

100

50

40 50 100

Contd.

Books of Accounts—Subsidiary Books 8

80

8 By Stationery

40

8 By Refreshments

20

9

1050

20

450

1500 450

40

1500

190

240 00 00 190 00

120

310

10 10 To Cash received

Objective Type Questions 1. Fill in the blanks: (a) The allowance made by the wholesalers to the retailers is called _____ discount. (c) When goods are returned, the seller sends a _____ note to the buyer. (d) A debit note is prepared and sent in connection with _____ returns. (e) The object of _____ discount is to induce the debtors to make prompt payment. 2. Match the following sets A and B: A B (a) Outstanding wages (i) Special Journal (b) Two aspects (ii) Personal Account (c) Credit note (iii) Sales Returns

(vii) Invoice 3. State whether the following statements are true or false: (b) Sales Returns Account is a Personal Account.

(e) Total sales made during a year are found out from the sales book.

Review Questions 1. 2. 3. 4.

What do you mean by subsidiary books? Subsidiary books are also called special journals. Why? Name the various subsidiary books. Write short notes on: (a) Credit note

109

110

Financial Accounting for Hotels

(c) Imprest system of petty cash book (d) Contra entry 6. What is the need for maintaining subsidiary books?

9. How double entry is completed when triple column cash book is maintained? 10. How do the other subsidiary books differ from the cash books? 11. Explain contra entries with examples. with proper headings. 13. Explain the process of posting in each of the following cases:

14. What is journal proper? What is the purpose of preparing a journal proper? 15. Explain, with the help of neatly drawn formats, the various types of subsidiary books. 16. What do you mean by petty cash book? Explain the different forms of petty cash book.

19. Explain, with a neat format, the sales summary when a restaurant sales book is maintained. 20. Explain the imprest system of petty cash book. What is the relation of petty cashbook to cash book? 21. What do you mean by triple column cash book? Why is it necessary to maintain a cash book?

Exercises 1. Match the following: A

B

1. Outstanding wages

a. Special journal

2. Two aspects

b. Personal account

3. Credit note

c. Sales return

4. Sales ledger

d. Prepaid expenses

5. Cash book f. Sundry debtors g. Invoice

Books of Accounts—Subsidiary Books

111

2. From the following particulars, prepare the Sales Book of Amar Traders who are dealers in furnishings: 2008 Jan. 7 Sold on credit to Teju traders 10 tables @ ` 500 per table 30 chairs @ ` 100 per table Jan. 12

Sold on credit to Basu and Co. 2 almirahs @ ` 2000 each 1 dining table @ ` 1000 each

Jan. 20

Sold one old typewriter to Mohan of Mangalore on credit ` 2000 6 chairs @ ` 100 each 4 tables @ ` 400 each

3. Prepare Purchases Book from the following particulars of Shri Vijay. 2003 ` 600 per saree less Purchase from Mysore Stores 200 garments at ` Sold to Prasad and Co. 80 silk sarees at ` 800 per saree Purchase from Bharat Stores 150 rugs a ` 300 per Rug less trade discount ` 250 4. Enter the following transactions in a cash book with three columns and balance it: 2005 March 1 Cash in hand ` 12,000 and cash at bank ` 16,000 4 Received from Prem ` 1400 6 Cash sales ` 750 ` 540 discount earned ` 10 13 Cash purchases ` 150 15 Withdrew from bank ` 600 18 Purchased furniture by cheque ` 2500 24 Paid into bank ` 300 25 Received a cheque from Balu and paid into bank ` 320 29 Paid rent ` 340 5. Compile a three column cash book from the following transactions: 1. Cash in hand ` 756 and bank overdraft ` 12,640 2. Received from A, a cheque for ` 15,200 in full settlement of his account of ` 15,500 and deposited into bank immediately 3. Purchased goods worth ` 1500 and paid by cheque 6 15 20

112

Financial Accounting for Hotels

4. 5. 6. 7. 8.

Mr. B settled his account of ` 7000 by cheque which was banked immediately Paid to Mr. C ` 4500 by cheque in full settlement of his account of ` 4650 Cash sales ` 15,000 of which ` 10,000 was deposited into bank Withdrew ` 5000 from bank for personal use Received from P a cheque of ` 2500

10. Bank charges as per pass book ` 150 11. Paid salaries by cheque ` 3600 ` 2000 ` 3000 6. Prepare a Petty Cash Book on the imprest system form the following: 2003 ` Jan. 1 Received ` 100 for petty cash 2 Paid bus fare 2.50 2 Paid carriage 2.50 3 Paid for postage and telegrams 5.00 4 Paid for stationery 8.00 5 Paid for repairs 15.00 5 Bus fare 2.50 5 Cartage 6.00 10 Postage 7.00 10 Cartage 5.00 10 Stationery 8.00 15 Refreshments to customers 18.50 7. Enter the following transactions in an Analytical Petty Cash Book under imprest system and balance it: 2003 Jan. 1 Received a cheque towards pretty cas ` 250 5 Paid taxi charge ` 60 8 Paid for cartages ` 10 10 Postage and telegram ` 12 14 Wages paid ` 20 18 Repairs to furniture ` 22 22 Subscriptions to newspaper ` 70 25 Refreshments to customers ` 25 28 Paid to Rakesh ` 10 30 Telephone charges ` 16 8. From the following transactions, prepare a suitable Cash Book: 2002 Jan. 1 Cash in hand ` 2000 and cash at bank ` 17,700 1 Paid rent by cheque ` 1000

Books of Accounts—Subsidiary Books

1 2 4

6 7

113

Received a cheque from Amarnath for ` 1750, allowed him a discount of ` 50 and presented the cheque at the bank Paid Samson Traders by cheque ` 1600 and settled their account of ` 1700 Received for cash sales, cash ` 750 and cheque ` 1250 ` 1175 and allowed him a discount of ` 75 Paid into bank ` 2425, the two cheques received on 4th and 5th Paid cash for electricity bill ` 250 ` 1500 ` 500

9. Record the following transactions in an Analytical Petty Cash Book under imprest system as on 1st April 2001. The petty cashier had a balance of ` 2500. 2001 April 1 3 5 6 7 10

` 55 ` 65 ` 225 ` 35 ` 105 ` 40 ` 200 13 Service charges to computer ` 150 18 Ink purchased ` 60 20 Paid to Shoba on account ` 555 22 Advertisement charges ` 160 26 Travelling expenses ` 105 30 Carriage ` 45 10. From the following particulars, write an Analytical Petty Cash Book: 2002 Jan. 1 1 3 5 7 8 10 14 28

Postage stamps purchased Sweeper charges paid Conveyance to manager Telegram to Mysore Stationery purchased Coolie paid

Balance in hand with petty cashier Received from cashier Paid for postage Purchase of stationery Sent a telegram Paid for carriage Paid to Murthy & Co. on account Auto charges Payment made for journals

` 30 ` 370 ` 4 ` 10 ` 9 ` 12 ` 50 ` 20 ` 12 ` 120

114

Financial Accounting for Hotels

11. Prepare a Three column Cash Book from the following transactions: 2003 March 1 Cash in hand Bank overdraft 3 Purchased goods for 5 Sold goods for 9 12 15 18 19 23

` 9000 ` 13,000 ` 5000 ` 15,000 ` 2750 Received ` 13,700 from Mathew and allowed him discount ` 300 Paid rent ` 2600 Paid into bank ` 1800 Paid Baby ` 5900 by cheque and he allowed him discount ` 100 Received a cheque for ` 8000 from Hameed and allowed him discount ` 200 Paid salaries by cheque ` 3300

25 Withdrew by cheque for personal use

`

650

12. From the following transactions, prepare a suitable cash book: July 1 Balance at bank Balance in hand Paid rent by cash Withdrew cash for private use 3 Sold meals for cash Purchased fruits by cheque 4 Received cheque from Birdsview & Co.

17 Paid wages in cash 21 Received cheque from Ramnivas 24 Sold meals for cash 28 Paid for refrigerator repairs by cheque 29 A cheque of ` 65 paid into bank on 21st July returned by Bank marked

Sold meals for cash 31 Paid wages in cash Banked cash

` 850 ` 275 ` 100 ` 100 ` 435 ` 60 ` 100 ` 450 ` 350 ` 85 ` 65 ` 200 ` 525 ` 40 ` 275

` ` ` `

220 250 45 100

Books of Accounts—Subsidiary Books

115

13. Enter the following transactions in a cash book with cash, bank and discount columns 2002 Jan. 1 2 10 10 15 16 20 22 24 25 26 28

Commenced business with ` 16,000 Paid into bank ` 14,500 Bought goods for ` 3850 and paid by cheque Bought furniture for cash ` 680 Sold goods for cash ` 2600 and deposited the same into the bank Bought goods for ` 4850 and paid by cheque Bought stationery for ` 185 Received cash from Hegde ` 680, allowing him a discount of ` 20 Paid Santhosh hims dues by a cheque ` 240 receiving a discount of ` 20 Paid Chandra by cheque ` 400 Sold goods for cash ` 585 and remitted the same into the bank Our cheque to Chandra returned dishonored ` 2365 ` 100 14. Calculate the amounts to be paid on the following accounts: ` ` ` ` ` hired a few employees. He tried to prepare his accounts and discovered that his collection from customers was ` 48,000 though he made a sale of ` 72,000. He borrowed from a bank ` 60,000. He had run down his savings substantially. His payments are: Wages to employees ` 24,000 Materials purchased ` 72,000 Payment of installment for equipment purchased ` 10,000 Electricity charges ` 2000 Withdrawals for personal use ` 30,000 Other payments for expenses ` 6000 He had some raw materials in his stores to the tune of ` a successful business during the year, but was surprised to know that his cash balance was nil. He is very confused now. Try to convince him by preparing a cash summary and explain the position.

116

Financial Accounting for Hotels

2005 March ` 1 Balance of cash in hand ` 1400 and overdraft at bank 5000 4 Invested further capital ` 10,000 of which ` 6,000 deposited in the bank 6 Sold food for cash 3,000 7 Collected from debtors of last year ` 8,000, discount allowed to them 200 10 Purchased raw materials for 5500 11 Paid Ramvilas, creditor ` 2500, discount allowed by him 65 13 Commission paid to our agent 550 2000 14 Rent paid by cheque 5000 14 Electricity charges paid 100 700 17 Cash sales 2500 18 Collections from Atul ` 4000 and deposited into the bank 500 150 ` 50, deposited in bank on the same day 25 Commission received by cheque 230 1500 29 Paid salary of the manager by cheque 1500 100 17. Record the following transactions in the appropriate books of prime entry, post them into ledger and make a trial balance. January 1 Opening cash balance ` 10,000 Bank balance ` 50,000 5 Additional capital brought by the proprietor ` 10,000 ` 2000 15 Purchased goods worth ` 18 Sold goods worth ` 20 Purchased goods worth ` 2000 from Mr.Amit on credit basis 25 Returned goods worth ` 500 to Amit 28 Purchased stationery worth ` 100 from super stationery mart 30 Received a cheque of ` ` 1000 18. Record the following transactions in the appropriate books of prime entry, post them into ledger and make a trial balance. January 1

Opening cash balance ` 20,000 Bank balance ` 15,000 ` 10,000

Books of Accounts—Subsidiary Books

117

Sold old chairs and tables on credit to Murray and Company ` 1000 Purchased goods worth ` 1000 for cash Sold goods for cash ` 2000 Purchased goods worth ` 2000 on credit from Mr.Anand Sold goods worth ` 5000 on credit to Mr.Anil Returned goods worth ` 500 to Mr.Anand Returned goods worth ` 200 by Anil ` 1000 ` 1000 31 Cash sales ` 1000 19. Record the following transactions in a suitably ruled cash book and arrive at the balance. ` Ps July 1 Balance at bank 842.90 Balance in hand 276.50 Paid rent in cash 100.00 Withdrew cash for private use 100.00 3 Sold meals for cash 435.00 Purchased fruits by cheque 58.75 4 Received cheque from Birds View & Co. 96.00 10 12 15 16 20 22 28

12 17 21

Purchased kitchen utensils by cheque Paid wages in cash Received cheque from Ram Nivas

346.00 86.50 63.00

24

Sold meals for cash Withdrew cash for personal use Paid for refrigerator repairs by cheque A cheque for ` 63 paid into the bank on 21 June returned by bank marked “refer to drawer” account Ram Nivas

525.50 40.00 285.50

28 29

Sold meals for cash Paid wages in cash Banked cash Balance the cash book on 14 and 28 July. 20. From the following particulars, prepare a suitable cash book: 1. Opening balance: Cash ` 1000 and Bank ` 1000 2. Received cash from the sale of an old oven ` 4000 3. Issued a cheque for ` 2000 in full settlement of ` 2050 due to John 4. Received a crossed cheque for ` 4000 from a debtor Johny 31

249.85 45.50 100.00

118

Financial Accounting for Hotels

5. Received cash ` 2000 and a cheque for ` 3000 from Janardhan for goods sold to him 6. Cheque issued to John dishnoured 7. Cheque received under item no. 5 above is endorsed to creditor Jaffer in full settlement of ` 3100 due to him 8. Cash deposited in bank ` 2500 ` 5100 after deducting ` 100 as discount by giving a cheque for ` 2500 and cash ` 2500

6

Chapter

Bank Reconciliation Statement

Learning Objectives

This chapter would help the reader to understand:

Bank reconciliation statement is a statement that reconciles the difference between the balance as per the cash book, which is maintained by the businessman, and the balance as per the passbook, which is maintained by the banker showing all causes of difference between the two. If can be passbook balance, prepared on any day for reconciling the two balances.” SIGNIFICANCE OF BANK RECONCILIATION STATEMENT

cash book or in the passbook.

doing.

120

Financial Accounting for Hotels

applications.

PASSBOOK

Reasons for difference between Cash Book and Passbook

1. Timing differences on recording of the transactions 2. Errors made by the business or by the bank Timing Differences

When a business compares the balance of its cash book with the balance shown by the bank passbook, there is often a difference, which is caused by the time gap in recording the transactions 1. Cheques issued by the bank but not yet presented for payment:

balances. 2. Cheques paid into the bank but not yet collected:

the balance shown by the bank passbook. 3. Direct debits made by the bank on behalf of the customer: Sometimes, the bank deducts

Bank Reconciliation Statement

121

the passbook will be less than the balance as per the cash book. 4. Amounts directly deposited in the bank account:

5. Interest and dividends collected by the bank:

differ. 6. Direct payments made by the bank on behalf of the customers: Sometimes the customers

balance as per the bank passbook would be less than the one shown in the cash book. 7. Cheques deposited/bills discounted dishonoured:

would be less than the cash book balance. Differences Caused by Errors

Sometimes the difference between the two balances may be accounted for by an error on the part balance shown by the cash book and the balance shown by the bank statement. 1.

Omission or wrong recording

cash book and passbook balance. 2. Errors committed in recording transactions by the bank: Omission or wrong recording bank while posting entries in the passbook also cause differences between the passbook and the cash book balance.

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Financial Accounting for Hotels

Table 6.1

Treatment of Various Items in Cash Book and Passbook Items

Treatment of various items

Balance as Per

Cash book Passbook Cash book Passbook Dr. (Dep) Cr. (Dep) Cr. (OD) Dr. (OD)

1.

+

–

–

+

2.

–

+

+

–

3.

–

+

+

–

–

+

+

–

5.

+

–

–

+

6. Interest allowed by bank

+

–

–

+

7.

+

–

–

+

8.

–

+

+

–

9.

–

+

+

–

10.

+

–

–

+

11.

–

+

+

–

12. Drawings made by partner not entered in cash book

–

+

+

–

4. insurance premium

Balance as Per

Passbook

Cash book Passbook

ILLUSTRATIONS

(a) Debit balance as per cash book

(d) Bank interest

` 1500 ` 100 ` 150 ` 20

Solution: Bank Reconciliation Statement as on__________ Particulars

`

1500

Debit balance as per cash book Add: Bank interest

`

150 20

170 1670

Contd.

Cash book

Bank Reconciliation Statement

123

Less: 100

100

Balance as per passbook

1570

` 7500 ` 300 ` 190 ` 10

Cash at bank as shown by cash book ` 200; Man Mohan Bank charges not yet entered in cash book Solution: Bank Reconciliation Statement as on__________ Particulars

`

` 7500

Debit balance as per cash book Add:

500

500 8000

Less: 190 10

Bank charges Balance as per passbook

200 7800

` 2300 on 31 December 1992. On ` 500 and ` 700 deposited ` 600, ` 800, and ` 1200 issued on December 28 were not presented for payment till 3 January1993. In addition to this, the bank had credited the merchant for ` 125 as interest and had debited him for ` 10 as bank charges, for which there were no corresponding entries in the cash book. Prepare a Bank Reconciliation Statement as on 31 December 1992. Solution: Bank Reconciliation Statement as on 31 December 1992 Particulars

`

` 2300

Debit balance as per cash book 2600

Add: Bank interest

125

2725 5025

Contd.

124

Financial Accounting for Hotels

Less: 1200 10

Bank charges Balance as per passbook

1210 3815

` 1850. On comparing ` 1360.79 had been issued towards the close of the year, ` 281.94 of which was presented for payment in January ` 1389.15 on 29 December 1992, of which ` ` 140.70 in the passbook in respect of interest on current account and has debited with ` 25 on 31 December 1992. Solution: Bank Reconciliation Statement as on 31 December 1992 Particulars

`

1850.00

Debit balance as per cash book Add: Bank interest

`

281.94 140.70

422.64 2272.64

Less: Bank charges

470.76 25

Balance as per passbook

495.76 1776.88

` 12,500 on 31 December 1992. `

(c) Bank paid insurance premium (d) Bank charges (e) Directly deposited by a customer Prepare a Bank Reconciliation Statement as on 31 December 1992.

500 30 800

Bank Reconciliation Statement

125

Solution: Bank Reconciliation Statement as on 31 December 1992 Particulars

`

` 12,500

Debit balance as per cash book Add:

Direct deposit by customer

600 200 800

1600 14,100

Less: Bank charges Insurance premium paid by bank

900 30 500

Balance as per passbook

1430 12,670

(a) Balance as per passbook ` 500 ` 60, ` 39.37 and ` 15.25 issued in July 1992 were presented at the ` 50 and ` 65 sent to bank for collection were not entered in the passbook by 31 July 1992. ` 46 for its commission and allowed interest ` 10, which were not mentioned in his bank account. Solution: Bank Reconciliation Statement as on 31 July 1992 Particulars

`

Balance as per passbook

` 500

Add: Bank Charges

115 46

161 661

Less: 114.62 10.00 Balance as per Cash Book

124.62 536.38

126

Financial Accounting for Hotels

of ` ` 300 on 25 December, but this was not presented for payment whereas this was recorded twice in the cash book. ` current account. ` 285 issued on 28 December was taken in the cash column. (d) In the passbook, a bank charge of ` 25 was recorded twice while another bank charge of ` 17 was not recorded in the cash book. Solution: Bank Reconciliation Statement as on 31 December 1992 Particulars

`

Balance as per passbook

` 10,000

Add: Bank charges entered twice in passbook Bank charges not entered in cash book

200 25 285 17

527 10,527

Less: 600 Balance as per cash book

Balance as per the passbook on 31 December 1992 is `

600 9927

` 5100 were ` 1200 were presented ` 200 was not presented for payment. ` 4800 were deposited in the bank during December, but ` ` bank has credited the merchant for ` 200 as interest and has debited him for ` 30 as bank charges, for which there are no corresponding entries in the cash book.

Bank Reconciliation Statement

127

Solution: Bank Reconciliation Statement as on 31 December 1992 `

Particulars

``

Balance as per passbook

8500

Add: Bank charges not entered in cash book

30 1000

1030 9530

Less: Direct deposit by customer Interest credited by bank

1400 800 200

2400

Balance as per cashbook

7130

9. In comparing the bank passbook up to 30th June 1992 with the bank account ledger (cash ` 500.

(b) ` 27.50 has been credited by the bank for half-yearly interest. ` 1000 and ` passbook until 1 July. ` 30 and ` within 30 June. Prepare a Bank Reconciliation Statement. Solution: Bank Reconciliation Statement as on 31 June 1992 Particulars

`

` 500

Add: Half-yearly interest credited by bank

27.50 505.00

532.50 1032.50

Less: 0.75 1250.00 Bank balance as per cash book

1250.75 218.25

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Financial Accounting for Hotels

` 1729.85. On comparing the cash book with the bank passbook, the following discrepancies ` 600 were not presented in the bank till 7 January 1993. ` 750 were deposited in the bank but were not collected. ` 1993. (d) ` in the cash book. (e) Bank charges ` cash book. Prepare a Bank Reconciliation Statement.

` 85 appear in the passbook but not in the

Solution: Bank Reconciliation Statement as on 31 December 1992 Particulars

`

` 1729.85

Overdraft balance as per cash book Add: 750 150 15 85

Bank charges not in cash book

1000.00 2729.85

Less: 600 1500 Overdraft as per passbook

2100.00 629.85

` 5500 as shown by the bank ` 1500 had been paid to the bank but of these only ` ` 3500, out of which only ` ` 200, which they had debited to bank passbook of ` 10 for bank charges and ` paid directly into their bank ` 1000 for credit of his account, but it was not shown in the ` 250 as per instruction, but this Prepare a Bank Reconciliation Statement.

Bank Reconciliation Statement

129

Solution: Bank Reconciliation Statement as on 31 June 1992 Particulars

`

` 5500

Add:

Bank charges not in cash book Insurance premium paid by the bank Interest debited in passbook

400 200 10 250 50 910 6410

Less: Direct receipt in to bank

1350 1000

2350

Overdraft as per passbook

4060

` ` 540 issued to Mohan has not been presented for payment. ` 100 has been debited in the bank column of the cash book but under no circumstances it was possible to present it. ` ` 400 deposited in the bank has been dishonoured. ` been made in the cash book. ` 15 in respect of bank charges and a credit of ` 25 for interest on current account, but no recorded in the cash book. Solution: Bank Reconciliation Statement as on 31 December 1992 Particulars

`

` 10,500

Overdraft Balance as per cash book Add:

Bank charges not in cash book

1200 100 15

Contd.

130

Financial Accounting for Hotels Insurance premium paid by the bank

50 400

1765 12,265

Less: 540 25

Interest on current account not recorded in cash book Overdraft as per Passbook

565 11,700

` ` payment. ` 900 has been debited in the bank column of the cash book, ` ` 4000 has been dishonoured. ` 10,000 was retired by the bank under a rebate of ` 150, but the full amount of the bill was credited in the bank column of the cash book. Prepare a Bank Reconciliation Statement. Solution: Bank Reconciliation Statement as on 31 December 1992 Particulars

`

` 40,500

Overdraft Balance as per cash book Add: 10,200 900 4000

15,100 55,600

Less: Bill retired by bank Overdraft as per passbook

5000 150

5150 50,450

` 23,650 shown by the cash book on that date. From a detailed comparison of the entries, (a) ` 2860 is entered in the cash book as paid into bank on 31 March 1993 but not credited by the bank until the following day.

Bank Reconciliation Statement

131

(b) Bank charges ` 70 on 31 March 1993 are not entered in the cash book. ` 5500 discounted with the bank is entered in the cash book without recording the discount charges of ` 270. ` 16,720 were issued by the company and duly recorded in the cash book before 31 March 1993 but had not been presented at the bank for payment until after that date. (e) On 25 March 1993, a debtor paid ` account, but no entry was made in the cash book of the company in respect of this. (f) No entry has been made in the cash book to record the dishonour on 15 March 1993 of ` Prepare a Bank Reconciliation Statement as on 31 March 1993. Solution: Bank Reconciliation Statement as on 31 March 1993 Particulars

`

Debit balance as per cash book

` 26,350

Add: Direct deposit by customer

16,720 1000

17,720 44,070

Less: Bank charges Bill discounted

Balance as per passbook

2860 70 270 550

3750 40,320

` 5670. From the following particulars, prepare a Bank Reconciliation Statement. ` 3946. amounted to ` 4891. ` and debited in the passbook. (d) Debit is also made in the passbook for ` ` ` 760 in the passbook.

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Financial Accounting for Hotels

Solution: Bank Reconciliation Statement as on 31 December 1992 Particulars

`

` 5670

Add: 4891 175 520

5586 11,256

Less: 3946 760 Overdraft as per passbook

4706 6550

Objective Type Questions

between ______ and ______. ______ balance in Cash Book and ______ balance in the passbook. (c) For a credit balance in a Bank Column of the Cash Book there is a ______ balance in

the passbook.

is reconciled

(a) Is prepared to ascertain the causes for the difference in the cash columns of the cash book and bank columns passbook balance (c) Is prepared to establish the causes of the difference between the balance shown by the bank columns of the cash book and that shown by the passbook

Bank Reconciliation Statement

133

Review Questions 1. 2. 3. 4.

What is a bank reconciliation statement? What is a passbook? What is the need for preparing a bank reconciliation statement? State the reasons for the difference between the cash book balance and the passbook balance. theoretically agree.

Exercises 1. From the following, information, prepare a Bank Reconciliation Statement as per passbook (a) Bank balance as per cash book ` 10,000. ` 900. (c) Bank charges debited in the passbook but not entered in the cash book ` 50. ` 1000. ` 800. `

Credit side of the bank column of the cash book short Bank charges entered in the cash book twice

100 10

Bills directly collected by bank Bank charges debited by bank

2000 12

Bills discounted dishonoured

4000

3. Prepare a Bank Reconciliation Statement from the following particulars and ascertain the `

(d) Insurance premium paid by bank under instructions not recorded in cash book 1500 (e) Bank charges entered twice in the cash book 50 made in the cash book

4000

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Financial Accounting for Hotels

(i) Bills discount dishonored but not recorded in cash book 1600 4. On 31 March 2002, the bank column of the cash book showed a credit balance of ` 11,810. ` 17,520 in March 2002 had been entered in the cash book as ` 2002. (b) Interest of ` 880 charged by the bank was not entered in the cash book. ` 1240. ` 2730 but no entry was made in the cash book. (e) ` 4490 was entered in the cash book as paid into bank on 30 March 2002 but credited

` 12,500 ` 1200 sent for collection was returned dishonoured, for which there was no entry in the cash book. ` ` 4000 were presented for payment in March. ` 1420 sent for collection was omitted to be recorded in cash book. (e) Bank charges ` ` 600 were recorded only in the passbook. ` book. ` 230. ` 8364 as the balance at bank as on 31

(a) On 15 December 2002, the payment side of the cash book was undercast by ` 100. ` 131 issued on 25 December 2002 was taken in the cash column. (c) One deposit of ` 150 was recorded in the cash book as if there is no bank Colum therein. (d) On 18 December 2002, the debit balance of ` forward as a credit balance. ` 11,514 drawn in the last week of December 2002, ` 7815 were encashed in December. ` 250 collected by the bank and subscription of ` 100 paid by it were not recorded in the cash book. ` 350 was recorded twice in the cash book. Prepare a Bank Reconciliation Statement.

Bank Reconciliation Statement

135

7. From the following particulars, prepare a Bank Reconciliation Statement as on 31 December ` 26,000 ` 3000 sent for collection was collected only on 3 January 2000. ` ` 10,000 were presented for payment before 31 December. ` 550 was credited in the cash book twice. (e) Direct payment by a customer to bank account ` 2200 did not appear in the cash book. ` 660 against the personal account of the trader was wrongly (g) Bank charges ` ` 440 appeared only in the passbook. ` 980 sent for collection was dishonored but no entry was passed in the cash book.

` 4500. ` 150. ` 7000 drawn and entered in the cash book had not been presented. ` current account. ` 6000 sent to bank for collection, though entered in the cash book, had not been credited by the bank. (f) Bank charges of ` 75 as per bank statement of account had not been taken in the cash book. ` 2500 had been paid direct to the bank and not entered in the cash book. March 2001. 9. From the following particulars, prepare a Bank Reconciliation statement as on 31 March (a) Bank balance as per cash book on 31 March 2002, ` 8000. `

` 1500

` ` 2000 only were presented for payment so far. ` debit of ` 200 for life insurance premium paid according to the standing instructions. ` 50 for bank charges and a credit of ` 150 for interest, for which there were no corresponding entries in the cash book. 10. Prepare a Bank Reconciliation Statement as on 31 December 2008 from the following

136

Financial Accounting for Hotels

Cash Book Dr.

Cr. Date

Particulars

L/F

Amount

Date

Particulars

L/F

2008 Dec. 1

1.000

2008 Dec. 1

4

800

13

By Salary

750

7

500

18

By Purchases

300

10

752

20

By Prakash

309

15

650

25

By Vinod

200

20

62

29

By Vishal

100

250

31

1855

3764 2009 Jan. 1

Amount

3764

1855

Passbook Dr.

Cr. Date

Particulars

L.F.

Amount

2009 Jan. 12

250

13

750

19

300

31

1,751

Date

Particulars

2009 Jan. 1

L.F.

Amount 1000 800

By Sales

500 725

By Interest 3051

26 3051

Feb. 1

1751

Trial Balance

7

137

Trial Balance

Chapter

Learning Objectives

This chapter would help the reader to understand: The meaning and features of trial balance The objectives of preparing the trial balance How to prepare a Trial Balance How to rectify errors If the journal entries are error-free and are posted properly to the general ledger, the total of all the debit balances should be equal to the total of all the credit balances. If the debit total is not equal to the credit total, then an error hast occurred somewhere in the process. credits, of all the accounts in the ledger with a view to verifying the arithmetical accuracy of posting into the ledger accounts”. FEATURES OF TRIAL BALANCE

The features of trial balance are as follows: 1. Trial balance can be prepared anytime during the accounting period. 2. It is prepared to check the arithmetical accuracy of posting of entries from journal to ledger. In other words, it is an instrument for carrying out the job of checking and testing. 3. It is not a part of the double entry system of bookkeeping, but only for checking the accuracy of posting. However, it does not reveal all errors.

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Financial Accounting for Hotels

OBJECTIVES OF PREPARING TRIAL BALANCE

1. To ascertain the arithmetical accuracy of the ledger accounts. 2. To help in locating errors.

To Ascertain the Arithmetical Accuracy of Ledger Accounts

As stated earlier, the purpose of preparing a trial balance is to ascertain whether all debits and credits are properly recorded in the ledger or not and that all accounts have been correctly balanced. As a summary of the ledger, it is a list of the accounts and their balances. When the totals of all the debit balances and credit balances in the trial balance are equal, it is assumed that the posting and balancing of accounts is arithmetically correct. However, the tallying of the trial balance is not a conclusive proof of the accuracy of the accounts. It only ensures that all debits and the corresponding credits have been properly recorded in the ledger. To Help in Locating Errors

When a trial balance does not tally (that is, the totals of debit and credit columns are not equal), we know that at least one error has occurred. The error (or errors) may have occurred at one of those stages in the accounting process: (1) totalling of subsidiary books, (2) posting of journal entries in the ledger, (3) calculating account balances, (4) carrying account balances to the trial balance, and (5) totalling the trial balance columns. It may be noted that the accounting accuracy is not ensured even if the totals of debit and credit balances are equal because some errors do not affect equality of debits and credits. For example, the bookkeeper may debit a correct amount in the wrong account while making the journal entry or in posting a journal entry to the ledger. This error would cause two accounts to have incorrect balances, but the trial balance would tally. Another error is to record an equal debit and credit of an incorrect amount. This error would give the two accounts incorrect balances, but would not create unequal debits and credits. As a result, the fact that the trial balance has tallied does not imply that all entries in the books of original record (journal, cash book, etc.) have been recorded and posted correctly. However, equal totals do suggest that several types of errors probably have not occurred. To Help in the Preparation of the Financial Statements

Trial balance is considered as the connecting link between accounting records and the preparation

All revenue and expense accounts appearing in the trial balance are transferred to the trading and sheet.

Trial Balance

139

The format of the trial balance is given in Figure 7.1. Name of Account

L/F

Dr. Balance `

Figure 7.1

Cr. Balance

Ps.

`

Ps.

Format of Trial Balance

Only those ledger A/cs which show balances should appear in the trial balance (Table 7.1). In the context of ledger balances, it is essential to know the nature of the balances of the various ledger accounts. Table 7.1 Various A/cs Apperaring in a Trial Balance Name of Account

L/F

Dr. Balance

Cr. Balance

`

`

Ps.

Capital

xxx

Sundry Creditors

xxx

Bills Payables

xxx

Any Liabilities

xxx

Purchase Returns

xxx

Sales

xxx

Drawings

xxx

Bank A/c

xxx

Sundry Debtors

xxx

Cash A/c

xxx

Purchases

xxx

Opening Stock

xxx

Investments

xxx

Any Assets

xxx

Bills Receivables

xxx

Any Expenses

xxx

Any Income Total

xxx xxx

xxx

Ps.

140

Financial Accounting for Hotels

ERRORS AND CLASSIFICATION OF ERRORS

categories (Figure 7.2).

ERRORS

Errors of Principle (Do not affect the agreement of the Trial Balance)

Compensating Errors (Do not affect the agreement of the Trial Balance)

Errors of Commission

Errors of Omission

Complete Omission (Do not affect the agreement of the Trial Balance)

Clerical Errors

Partial Omission (Affect the agreement of the Trial Balance)

Not affecting the Agreement of the Trial Balance

Affecting the Agreement of Trial Balance

Wrong Casting Entry in Wrong Subsidiary Book

Wrong Carry Forward Wrong Carry Forward

Entry in two Subsidiary Books

Wrong Balancing Omission of Posting an Amount from Day Book Posting to the Wrong Side of an Account

Posting to a wrong account, but on the correct side

Posting to a Wrong Amount to an Account Posting the Same Amount Twice Omission of an Amount from Trial Balance

Writing wrong amount in a Subsidiary Book

FIgure 7.2

Bringing the Balance of an Account to the Wrong Side of the Trial Balance

Errors

Trial Balance

1. 2. 3. 4.

141

Errors of Commission Errors of Omission Errors of Principle Compensating Errors

Errors of Commission Errors of Commission are the errors which are committed due to:

For example: Ambani Traders paid ` 5200 to Pramod Traders (a supplier of goods). This transaction was correctly recorded in the cash book. But while posting to the ledger, Pramod’s account was debited with ` 2500 only. This constitutes an error of commission. Such an error by

Errors of Omission

The errors of omission may be committed at the time of recording the transaction in the books of original entry or while posting to the ledger. These can be of two types: (i) Error of complete omission (ii) Error of partial omission When a transaction is completely omitted from recording in the books of original record, it is an error of complete omission. For example, credit sales to Ram ` 10,000 is not entered in the sales book. When the recording of a transaction is partly omitted from the books, it is an error of partial omission. If, in the above example, credit sales had been duly recorded in the sales book but the posting from the sales book to Ram’s account had not been made, it would be an error of partial omission. Errors of Principle

Accounting entries are recorded as per the generally accepted accounting principles. If any of these principles are violated or ignored, errors resulting from such violation are known as errors of principle receipt between capital and revenue. This is very important because it will have an impact on example, amount spent on additions to the buildings should be treated as capital expenditure and must be debited to the asset account. Instead, if this amount is debited to the maintenance and repairs account, it has been treated as a revenue expense. This is an error of principle. Similarly, if a credit purchase of machinery is recorded in the purchases book instead of journal proper or the rent paid to the landlord is recorded in the cash book as payment to the landlord, these and errors of principle. These errors do not affect the trial balance.

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Financial Accounting for Hotels

Compensating Errors

When two or more errors are committed in such a way that the net effect of these errors on the debits and credits of accounts is nil, such errors are called compensating errors. Such errors do not affect the tallying of the trial balance. For example, if the purchases book has been overcast by ` 1000 resulting in excess debit of ` 1000 in the purchases account and the sales returns book is undercast by ` 1000 resulting in short debit to the sales returns account is a case of two errors compensating each other’s effect. One plus is set off by the other minus; the net effect of these two errors is nil and so they do not affect the agreement of the trial balance. An account in which the difference in the trial balance is put till such time that errors are located suspense account when the trial balance is not tallying.

One-sided Error

If an error was made only in one account and this is affecting the agreement of the trial balance, it is called a one-sided error. This does not require journal entries to rectify. For example, the sales book for November is undercast by ` 200; ` 200 received from Ram has been entered by mistake on the debit side of his account. Two-sided Error

The two-sided errors are those errors which have been made on both accounts, which requires ` 2000 has been entered in the purchase book; ` 100 received from Kamal Kishore has been credited in the account of Krishan Kishore. RECTIFYING ENTRY

If an error is committed in the books of account and if it is located after some time, the correction should be made by making another suitable entry, called rectifying entry. Post-Closing Trial Balance

If all the accounting formalities are completed with utmost accuracy, we will be able to prepare a in the accounts, which will cause a difference in the trial balance and we cannot prepare a correct

a trial balance prepared after the normal accounting period after rectifying the errors through post-closing trial balance. ILLUSTRATIONS

1. Rectify the following errors: (a) The sales book of December was added short by ` 10.

Trial Balance

143

(b) A periodical total of purchase book has been cast short by ` 50. (c) The total of purchase returns book has been undercast by ` 150. (d) The sales returns book is added ` 20 short. Solution: by writing on the credit side of the sales account as “By undercast in sales book ` 10”. (b) Since it is a one-sided error affecting the debit side of the purchase account, it can be “To undercast in purchase book ` 50”. (c) Since it is a one-sided error affecting the credit side of the purchase returns account, it can “By undercast in purchase returns book ` 150”. (d) Since it is a one-sided error affecting the debit side of the sales returns account, it can be “To undercast in sales returns book ` 20”. 2. Rectify the following errors: (a) The returns inward book has been overcast by ` 20. (b) Purchases book carried forward ` 75 less. (c) Sales book carried forward ` 41 less on page 10 and ` 43 on page 12. (d) Goods sold to Gautam were posted as ` 215 instead of ` 251. Solution: (a) Since it is a one-sided error affecting the debit side of the sales returns account as an “By overcast in sales returns account ` 20”. (b) Since it is a one-sided error affecting the debit side of the purchase account, it can be “To undercast in purchase book ` 75”. by writing in the credit side of sales account as “By undercast in sales book ` 41” on page 10 and “By undercast in sales book ` 43” on page 12. by writing on the credit side of the sales account as “By undercast in sales book ` 36”. 3. The following errors are disclosed in the books of Nandhini Restaurant. Make necessary entries to rectify them: (a) Purchase journal was undercast by ` 215. (b) ` 500 received from K. Krishna was debited to his account. (c) Discount allowed to Sham Lal of ` 30 on his payment of ` 470 has not been entered in the discount column of the cash book. The credit to Sham Lal’s account stands at ` 500.

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Financial Accounting for Hotels

Solution: (a) Since it is a one-sided error affecting the debit side of the purchase account, it can be “To undercast in purchase account ` 251”. writing on the credit side of his account as “By correction wrong debit ` 1000”. (c) Since it is a one-sided error affecting the debit side of the discount allowed account, it can “To omission of posting ` 30”. 4. Correct the following errors in Pizza Hut Book: (a) A sum of ` 150 written off as depreciation on furniture has not been debited to depreciation A/c. (b) The returns outward journal has been overcast by ` 85. (c) Basudev returned goods worth ` 50; his account was debited by this amount. (d) A purchase from Krishna Mohan of ` 225 has been debited to his account. Solution: (a) Since it is a one-sided error affecting the debit side of the depreciation account, it can be A/c ` 150”. (b) Since it is a one-sided error affecting the credit side of the returns outward A/c as an excess of ` “To overcast in returns outward A/c ` 85”. (c) Since it is a one-sided error affecting the debit side of Basudev’s A/c as a wrong debit, it can “By correction of wrong debit in Basudev’s A/c ` 100”. (d) Since it is a one-sided error affecting Krishna Mohan’s debit side as a wrong debit of ` 225, “By correction of wrong debit in Krishna Mohan’s A/c ` 450”. 5. Rectify the following errors: (a) A purchase of ` 200 from Ram was omitted to be entered in the purchase book. (b) A credit sale of ` 257 to M/s. Goodluck & Co. was recorded as ` 275. (c) A purchase of furniture for ` 500 from Salwan Furnitures was entered through the purchase book. (d) Rent paid to landlord ` 500 was debited to his personal account. (e) Purchase book was undercast by ` 100. Solution: (a) Since it is a one-sided error affecting the debit side of purchase A/c as an omission, it can “To omission of posting in purchase A/c ` 200”.

Trial Balance

145

(b) Since the error is a two-sided error affecting both sales A/c credit side as an excess and Sales A/c Dr. To Goodluck & Co. A/c

` 18

Furniture A/c Dr. To Purchase A/c

` 500

Rent A/c Dr. To Landlord A/c

` 500

` 18

` 50

` 500

(e) Since it is a one-sided error affecting the debit side of the purchase A/c as an undercast, “To undercast in purchase A/c ` 100”. (a) A sum of ` 160 paid by way of rent has been debited to landlord’s personal A/c. (b) Furniture sold for ` 800 has been posted to the sales account. (c) An amount of ` 400 withdrawn by the proprietor for his personal use has been debited to trade expenses A/c. (d) ` (e) Private expenses ` 210 have been posted to general expenses A/c. Solution:

Rent A/c Dr. To Landlord A/c

` 160 ` 160

writing a complete journal entry: ` 800

Sales A/c Dr. To Furniture A/c

` 800

(c) Since it is an error of principle affecting drawings A/c and trade expenses A/c, it can be Drawings A/c

Dr.

` 400 ` 400

To Trade Expenses A/c writing a complete journal entry: Repairs A/c To Buildings A/c

Dr.

` 45 ` 45

146

Financial Accounting for Hotels

(e) Since it is an error of principle affecting drawings A/c and general expense’s A/c it can be Drawings A/c Dr. To General Expenses A/c

` 210 ` 210

7. Give journal entries to rectify the errors in the following cases: (a) A purchase of goods from David amounting to ` 150 has been wrongly passed through the sales book. (b) A credit sale of goods of ` 120 to Peter has been wrongly passed through the purchases book. (c) ` 200 salary paid to cashier, B. Naidu, stands wrongly debited to his personal A/c. (d) ` 100 received from Shaw & Co. has been wrongly entered as from Shah & Co. Solution: passing a compound journal entry as: Purchase A/c Dr. Sales A/c Dr. To David A/c

` 150 ` 150 ` 300

by writing a compound journal entry as: Peter A/c Dr. To Purchases A/c To Sales A/c

` 240 ` 120 ` 120

journal entry as: Salary A/c Dr. To Naidu’s A/c

` 200

Shah & Co. A/c Dr. To Shaw & Co. A/c

` 100

` 200

` 100

8. The following mistakes were located in the books of Samrat Restaurant after its books were closed and a suspense A/c was created in order to get the trial balance agreed: (a) Sales day book was overcast by ` 100 (b) A sale of ` 50 to X was wrongly debited to the account of Y. (c) General expenses ` 18.25 was posted in the general ledger as ` 1.82. (d) A bill receivable for ` 155.30 was passed through bills payable day book. This bill was given by P.

Trial Balance

147

(e) Legal expenses ` 119 paid to Mr. Duftry was debited to his personal A/c. Find out the nature and amount of the suspense A/c and pass the entries for Solution: (a) Since it is a one-sided error affecting the sales day book as an excess in the credit side, it can ` 100

Sales A/c Dr. To Suspense A/c

` 100

a journal entry as: Suspense A/c To Y A/c

` 50

Dr.

` 50

(c) Since it is a one-sided error affecting the general expenses debit side as a shortage of ` General expenses A/c To Suspense A/c

` 16.43

Dr.

` 16.43

(d) Since it is an error affecting the bills receivable A/c, bills payable A/c and P’s A/c, it can be

(e)

Bills Receivable A/c Bills Payables A/c To Suspense A/c

Dr. Dr.

Suspense A/c To Mr. Duftry

Dr.

` 155.30 ` 155.30 ` 310.60 ` 119 ` 119

Suspense A/c Dr.

Cr.

Date

Particulars To Y To Mr. Duftry

To difference in TB

J/F

Amt. 50 119

Date

Particulars

J/F

Amt.

By Sales A/c

100.00

By Bills Receivable

155.30

By Bills Payable

155.30

241.60 410.60

410.60

9. There was an error in the trial balance of Dominos Pizza on 31 December 1992 and the that:

148

Financial Accounting for Hotels

(a) (b) (c) (d) (e)

` 540 received from M. Mehta was posted to the debit side of his account. ` 100 being purchase returns was posted to the debit of purchases A/c. Discount ` 300 received was posted to the debit of discount A/c. ` 374 paid for repairs to motor car was debited to Motor Car A/c as ` 174. ` 400 paid to C. Dass was debited to the account of G. Dass. Give journal entries to rectify the above errors, and state what amount was carried to suspense A/c.

Solution: Journal Entries Date (a)

Particulars Suspense A/c

L/F Dr.

Dr. Amt. 1080

To M. Mehta

(b)

1080

Suspense A/c

Dr.

200

To Purchase A/c

(c)

200

Suspense A/c

Dr.

600

To Discount Received A/c

(d)

Cr. Amt.

600

Repairs to Motor Car A/c

Dr.

374

To Motor Car A/c

174

To Suspense A/c

200 ` 200)

(e)

C. Dass A/c To G. Dass A/c

Dr.

400 400

10. The trial balance of Shanthi Saagar did not agree, and the difference in the books was carried to suspense A/c. Pass the entries required to rectify the following errors, which accounted for the difference. Also prepare the suspense A/c. (a) A sales invoice for ` 1000 for goods sold on credit to B. Basu was entered in the purchases book; but in the ledger, the amount was correctly debited to the account of B. Basu (b) Goods bought on credit from Ram Lal for ` 1500 were wrongly debited to his account as ` 5100.

Trial Balance

149

(c) A cash discount of ` 50 allowed to G. Gupta remained unposted to his account in the ledger from the cash book. (d) The sales book for the month of April was undercast by ` 100. (e) ` 460 paid for repairs to building was debited to building A/c. Solution: Journal Entries Date (a)

Particulars Suspense A/c

L/F Dr.

Dr. Amt. 2000

To Purchase A/c

(b)

2000

Suspense A/c

Dr.

6600

To Ram Lal

(c)

6600

Suspense A/c

Dr.

50

To G. Gupta’s A/c

(d)

50

Suspense A/c

Dr.

100

To Sales A/c

(e)

Cr. Amt.

100

Repairs A/c

Dr.

460

To Buildings A/c

460

11. Prepare a trial balance from the following: Raju’s capital A/c Raju’s drawings A/c Insurance

` 3,50,000 60,000 25,000

Sundry creditors Purchases Sales Discount allowed

2,00,000 1,00,000 1,40,000 30,000

Printing and stationery Rent Opening stock Trade expenses Commission received Salaries

` 35,000 30,000 50,000 1,40,000 80,000 40,000

150

Financial Accounting for Hotels

Solution: Trial Balance as on__________ Particulars

Dr. Amt.

Raju’s capital

Cr. Amt. 3,50,000

Raju’s drawings

60,000

Insurance

25,000

Sundry debtors

1,80,000

Sundry creditors

2,00,000

Purchases

1,00,000

Sales

1,40,000

Discount allowed

30,000

Printing and stationery

35,000

Rent

30,000

Opening stock

50,000 80,000

Trade expenses

1,40,000

Commission received

80,000

Salaries

40,000 Total

7,70,000

7,70,000

12. Prepare a trial balance from the following: Hari’s capital A/c Hari’s drawings A/c Opening stock Sundry creditors Machinery

` 5,00,000 50,000 2,00,000 4,90,000 2,20,000

Sundry debtors Sales Cash at bank Cash in hand Bad debts

4,00,000 6,05,750 1,51,000 9000 15,000

Purchases Discount allowed Carriage inwards Returns outwards Insurance Rent and rates Salaries Returns inwards Bills receivable

` 3,50,000 15,000 13,000 10,000 14,000 14,500 86,000 20,000 26,500

Trial Balance

Solution: Trial Balance as on__________ Particulars

Dr. Amt.

Hari’s capital

Cr. Amt. 5,00,000

Hari’s drawings Opening stock

50,000 2,00,000

Sundry creditors Machinery

4,90,000 2,20,000 15,000

Sundry debtors

4,00,000

Sales

6,05,750

Cash at bank

1,51,000

Cash in hand

9000

Bad Debts

15,000

Purchases

3,50,000

Discount allowed

15,000

Carriage inwards

13,000

Return outwards Insurance

10,000 14,000

Printing and stationery

6750

Rent and rates

14,500

Salaries

86,000

Returns inwards

20,000

Bills receivable

26,500

Total

16,05,750

13. From the following, prepare a trial balance: Mathew’s capital A/c Opening stock Cash at bank Cash in hand

` 10,000 2000 1000 440

16,05,750

151

152

Financial Accounting for Hotels

Machinery

6000

Purchases Wages Fuel and power Factory lighting Salaries Discount allowed Discount received Advertisement

15,000 10,000 3000 200 7000 500 300 5000

Sales Sundry debtors Sundry creditors

50,000 8500 3700

Solution: Trial Balance as on__________ Particulars

Dr. Amt.

Mathew’s capital A/c

10,000

Opening stock

2000

Cash at bank

1000

Cash in hand

440

Machinery

Cr. Amt.

6000 1360

Purchases

15,000

Wages

10,000

Fuel and power

3000

Factory lighting

200

Salaries Discount allowed

7000 500

Discount received Advertisement

300 5000 4000

Contd.

Trial Balance Sales

50,000

Sundry debtors

8500

Sundry creditors Total

3700 64,000

64,000

14. From the following information, prepare a trial balance: Ajit’s capital A/c Ajit’s drawings A/c Purchases Salaries Stock at the beginning Machinery Wages Sales Furniture Sundry debtors Sundry creditors Returns outwards Returns inwards Cash at bank Cash in hand Rent and rates Carriage inwards Freight Travelling expenses Repairs Discount received Bills receivable Bills payable Income tax General expenses

` 25,400 1800 18,200 1200 1100 5000 800 24,000 1400 9000 7800 300 400 7000 400 1300 200 2600 600 50 450 3500 1550 1700 3250

153

154

Financial Accounting for Hotels

Solution: Trial Balance as on__________ Particulars

Dr. Amt.

Ajit’s Capital A/c Ajit’s Drawings A/c Purchases

Cr. Amt. 25,400

1800 18,200

Salaries

1200

Stock at the beginning

1100

Machinery

5000

Wages

800

Sales

24,000

Furniture

1400

Sundry debtors

9000

Sundry creditors

7800

Returns outwards

300

Returns inwards

400

Cash at bank

7000

Cash in hand

400

Rent and rates

1300

Carriage inwards Freight

200 2600

Travelling expenses Repairs

600 50

Discount received Bills receivable

450 3500

Bills payable

1550

Income tax

1700

General expenses

3250

Total

59,500

59,500

Trial Balance

15. Prepare a trial balance from the following: Drawings A/c Plant and machinery

` 2000 1,00,000

Capital A/c Sales Loose tools Goodwill Opening stock Returns outward Discounts (Cr.) Purchases Returns inward Wages Sundry creditors Reserve for doubtful debts Carriage inward Salaries General expenses and insurance Rent and taxes Postage and telegrams Bank overdraft Sundry debtors Cash and bank balances

1,76,000 4,68,000 20,000 10,000 20,000 4000 6000 2,12,000 8000 1,00,000 24,000 2000 12,000 41,600 72,000 14,400 4000 20,000 58,000 14,000

Solution: Trial Balance as on__________ Particulars Drawings A/c Plant and machinery

Dr. Amt.

Cr. Amt.

2000 1,00,000 12,000

Capital A/c

1,76,000

Sales

4,68,000

Loose tools

20,000

Contd.

155

156

Financial Accounting for Hotels Goodwill

10,000

Opening stock

20,000

Returns outward

4000

Discounts (Cr.)

6000

Purchases

2,12,000

Returns inward

8000

Wages

1,00,000

Sundry creditors

24,000

Reserve for doubtful debts

2000

Carriage inward

12,000

Salaries

41,600

General expenses and insurance

72,000

Rent and taxes

14,400

Postage and telegrams

4000

Bank overdraft

20,000

Sundry debtors

58,000

Cash and bank balances

14,000

Total

7,00,000

7,00,000

Objective Type Questions Identify which of the phrases complete the sentences given below: (i) ` 2000 paid as wages for installing kitchen equipment should be debited to (a) The wages A/c (b) Kitchen equipment A/c (c) Capital A/c (ii) On purchase of old restaurant furniture, the amount of ` 1500 spent on its repairs should be debited to (a) The repairs A/c (b) Furniture A/c (c) Cash A/c (iii) Goods worth ` 50 given as charity should be credited to (a) The charity A/c (b) Sales A/c (c) Purchase A/c

Trial Balance

157

(iv) Goods worth ` 1000 taken by the proprietor for domestic use should be credited to (a) The sales A/c (b) Proprietor’s personal expenses A/c (c) Purchases A/c (d) Expenses A/c (v) Errors of omission do not permit (a) Correct totalling of the balance sheet (b) Correct totalling of the trial balance (c) Trial balance to agree (vi) The preparation of a trial balance helps in (a) Locating clerical errors (b) Locating errors of omission (c) Locating errors of principle (vii) ` 200 received from Shiva whose account was previously written off as bad debt should be credited to (a) The Bad Debt Recovered A/c (b) Shiva’s A/c (c) Cash A/c ` 12,000 has been debited to general expenses account. It is (a) A clerical error (b) An error of principle (c) An error of omission (a) The purchases account (c) Sales account (a) Sales A/c (c) Cash A/c

Review Questions 2. 3. 4. 5.

What are the objectives of preparing a trial balance? Distinguish between one-sided error and two-sided error. What is a suspense account? When is it opened and when it is closed? What is post close trial balance? (a) Errors of commission (b) Errors of omission

158

7. 8. 9.

10.

Financial Accounting for Hotels

(c) Errors of principle (d) Compensating errors What is the importance of the trial Balance in the double entry bookkeeping system? What are the advantages of a trial balance? What balances (debit/credit) would the following accounts normally show: (a) Machinery (b) Creditors (c) Sales (d) Purchase returns (e) Cash (f) Drawings (g) Capital (h) Bills Payable (i) Bank over draft (j) Salaries Explain the different types of errors with suitable examples.

Exercises 1. Rectify the following errors: (a) A sale of old furniture of ` 200 has been credited to the sales account. (b) Purchase of furniture for ` 1000 has been debited to the purchase account. (c) ` 300 paid to R. Jayaram has been debited to J. Jayaram. (d) Rent of ` 500 paid to landlord has been debited to the landlord’s account. (e) An amount of ` 500 withdrawn by the proprietor has been debited to general expenses. 2. Rectify the following errors: (a) Salary paid to Mohan has been debited to his personal account ` 300. (b) ` 1500 withdrawn by the proprietor has been debited to the general expenses account. (c) Wages paid ` (d) ` 600 received as interest has been wrongly credited to the commission account. (e) Purchase of loose tools has been debited to purchases account ` 300. (f) Cash ` 400 received from Ahmed has been credited to Anand’s account. 3. The following errors were found in the books of Metro. Rectify them. (a) ` (b) ` 500 received from Vijay has been wrongly entered in Vinod’s account. (c) Goods worth ` 169 purchased from Kamath stores in the latter account was actually debited by ` 196. (d) Repairs were debited to machinery account ` 200. (e) The total of the discount column on the credit side of the cash book was under cast by ` 30. (f) An amount of ` 400 withdrawn by the proprietor for his personal use was debited to the general expenses account. 4. The trial balance showed an excess of ` 970 on the debit side and, therefore, it was transferred to the credit side of the suspense account on 31.12.2008. During the year 2008, the following errors were detected. Pass the journal entries to rectify the same and open suspense account. (a) ` 840 received from Anil was posted to his debit (b) ` 720 for goods purchased from Vinod was posted to his account as ` 1260.

Trial Balance

159

(c) ` 550 withdrawn for personal use by the proprietor was debited to the general expenses account. (d) Rent of ` 520 is posted twice to the rent account. (e) ` 90 discount received from Dinesh was not posted to his account. (f) ` 500 paid for salaries was posted to the personal account of the manager. (g) Commission of ` 300 paid was posted to the credit side. 5. Rectify the following errors: (a) Cash payment of ` 1000 to Dina was credited to his account in the ledger. (b) Cash receipt of ` 300 from Ravi was posted to the credit of Prasad. (c) Sales return of ` 110 from Ganga was debited to Gauri’s account from sales return book. (d) Purchases of 510 from Dina was posted to his account as ` 150. (e) A cheque of ` 2100 received from Praveen was credited to Praveen’s account as ` 1200 from the cash book. 6. Prepare a trial balance from the following ledger balances: ` Capital 70,000 Machinery 25,000 Bills payable 5000 Salaries 12,000 Drawings 3000 Creditors 10,500 Furniture 15,000 Returns inwards 5000 Bills receivable 5000 Stock 15,000 Cash at bank 5000 Advertisement 500 7. From the following information, prepare a Trial Balance as on 31 March 2002: Capital Purchases Returns inwards Discount allowed Motor vans Carriage Sundry debtors Cash in hand Stock

` 2000 2550 160 160 350 140 1520 40 1650

160

Financial Accounting for Hotels

Sales Returns outwards Discount received Wages and salaries Rent and rates Sundry creditors Bank overdraft 8. Prepare a trial balance from the following: Opening stock Sundry debtors Capital Plant and machinery Creditors Wages Salaries Discount received Sales Land and building Purchases Returns outwards Cash 9. Prepare a trial balance from the following: Amount due to Ramesh Furniture Sales Return outwards Purcahses

3180 140 140 500 370 1450 490 ` 2500 2000 5000 1000 1000 600 200 1000 15,000 3000 9750 100 3050 ` 10,000 10,000 1,00,000 10,000 1,50,000

Capital 60,000 Bank overdraft 15,000 Due from suresh 20,000 Bills payable 10,000 Outstanding expenses 5000 10. From the following balances extracted from the books of Nilgiris Departmental Store as on 31.12.2001, prepare a trial balance:

Trial Balance

Gopal’s capital Purchases Rent paid Gopal’s drawings Bills receivable Opening stock Purchases returns Sales returns Plant and machinery Sales Sundry debtors Furniture Salaries Sundry creditors Carriage Insurance Cash in hand Cash at bank Commission paid Bills payable Discount received Discount allowed

` 7000 8000 240 1200 400 1000 280 160 4000 9600 5600 500 720 5600 100 40 100 1950 40 1580 30 40

161

8

Final Accounts

Chapter

Learning Objectives

This chapter would help the reader to understand:

1. Trading Account

called as

TRADING ACCOUNT

163

Final Accounts Dr.

Trading Account

Cr.

For the year ended __________ Particulars

Amount

To Opening Stock

Amount xxx

To Purchases

xxxx

Less: Purchase Returns

xx

Particulars By Sales

Amount

Amount

xxxxx

Less: Sales Returns

xx

xxxxx

xxxx

To Direct Expenses (on Purchase & Manufacturing)

xxxx

By Closing Stock

????

By Gross Loss (if any)

(Tfd to P&L Account)

xxx

(Tfd to P&L A/c) xxxxx

Figure 8.1

xxxxx

Format of Trading Account

Opening Stock

Net Purchase

Direct Expenses

Net Sales

Closing Stock

`

164

Financial Accounting for Hotels

` ` 90.

(credit

PROFIT AND LOSS ACCOUNT

For the year ended __________ Particulars

Amount

To Gross Loss (if any)

Amount

Particulars

xxx

To Indirect Expenses & Losses

Amount

Amount xxxx

By Indirect Incomes & Gains

xxx

By Net Loss (if any) tfd to Capital A/c

???

xxx — Administrative Expenses

xxx

— Selling Expenses

xxx

— Distribution Expenses

xxx

???

tfd to Capital A/c

xxxxx

Figure 8.2

xxxxx

Final Accounts

Indirect Expenses and Losses

Selling and Distribution Expenses

Bad Debts

Provision or Reserve for Doubtful Debts

Other I

I

165

166

Financial Accounting for Hotels

NEED FOR PROFIT AND LOSS ACCOUNT

Control Over Expenses

BALANCE SHEET

.

TYPES OF EXPENDITURE

Capital expenditure

Final Accounts

Revenue expenditure

Deferred revenue expenditure

167

168

Financial Accounting for Hotels

TYPES OF ASSETS

Contingent liability

GROUPING OR MARSHALLING A BALANCE SHEET

DIFFERENCE BETWEEN PROFIT AND LOSS ACCOUNT AND BALANCE SHEET

is close. FINAL ACCOUNTS AND ADJUSTMENTS

Outstanding Expenses

Prepaid Expenses

are called

or

.

Final Accounts

169

Accrued Income

called

Unearned Income

Provision for Doubtful Account

Provision for Discount on Debtors Account

Adjustments Entries

Table 8.1

1.

Adjustment Entries

Dr. Dr. side

side

Contd.

170

Financial Accounting for Hotels

2. Prepaid

Dr. side side

3.

Dr. Add to the concerned side side

4.

Dr. side side

5. Depreciation

Dr. asset concerned

6.

Dr. side

7.

Dr.

Interest on

Add to capital

Dr. capital

9.

Dr.

10.

Dr.

Add to loan on the

on the asset side 11.

Dr. on the asset side

12.

Dr. on the asset side

Discount on Drs. on Drs.

Contd.

171

Final Accounts 13. creditor on the

Dr.

Difference between Balance Sheet and Trial Balance

Purpose

Headings

Does not appear Period

Balance Sheet as on__________

Current Liabilities

Current Assets

Mortgages

Capital

Contd.

172

Financial Accounting for Hotels

Patents

xxxxx

xxxxx

Points to be Kept in Mind while Preparing Final Accounts

INTEGRATED FINAL ACCOUTNS AND STATEMETNS Trading Account For the year ended __________

To Purchases

????

xxxxx

xxxxx

For the year ended __________

Contd.

Final Accounts

173

???

???

xxxxx

xxxxx

Balance Sheet As on __________

Mortgages

Capital

Patents

xxxxx

xxxxx

174

Financial Accounting for Hotels

SHORT CUT TO ADJUSTMENTS IN FINAL ACCOUTNS Trading Account For the year ended __________

For the year ended __________

To Depreciation

Balance Sheet As on__________

Contd.

175

Final Accounts

Capital

ILLUSTRATIONS

` ` ` ` ` ` ` ` ` `

Purchases

` 5000 ` 1000 ` 50 ` 2000 ` 400 ` ` 700 ` 200 ` 150 ` 100

Adjustments:

` 1450 ` 400 ` Solution:

`

`

`

`

2000 To Purchases

300 500

To Wages

1450 5000

Contd.

176

Financial Accounting for Hotels

150 100

500

18,050

18,050

500 To Depreciation on P&M

400 50 40

90 400 700

2790

200 To Interest on capital

500 2790

`

2790

`

`

`

1200

2400

500

1000

40

1450

Capital 1000

4000

9000 Interest on capital

Depreciation

.400

3600

500 9500 2790

6710 8450

8450

Final Accounts

177

Trial Balance

Purchases Purchase returns

6000 1600

Discount

400

Wages Furniture

2000 1400 1240 2500 3770 240 3,39,600

3.39.600

Adjustments:

` ` ` 440 Solution

Contd.

178

Financial Accounting for Hotels

To Purchases Purchase returns To Wages

1600 6000

2,15,400 45,000

5560 440

6000 1400 75,000 2,60,400

To Discount

2,60,400

400 1700

200

To Depreciation on Furniture

1600

100 1240 56,100 75,000

75,000

Balance Sheet

240

440

200

3770

2500

Contd.

depreciation

1700

Furniture

Contd.

179

Final Accounts Depreciation

100

1900 1,57,140

1,57,140

`

`

Wages

4300

Discount

1000

Postage

273

Adjustments:

` Solution:

`

`

`

`

9945 To Purchases To Wages

4300

92,482

92,482

4000

Contd.

180

Financial Accounting for Hotels

To Interest

1295

To Insurance

417 400

To Discount

1000

To Postage

273

To interest on capital

16,145

`

16,145

`

`

`

400

9600

interest on capital Depreciation

Depreciation

66,532

66,532

`

`

Final Accounts

Purchases

181

2000

`

Adjustments:

` 50. Solution:

`

Purchases

`

`

`

1600

4200

2000

1600

150 To Wages 160 1090 5800 1090 To Depreciation on P&M

1200 190 390 450 50

2490 500 500 2780

2780

182

Financial Accounting for Hotels

`

`

`

`

2600

2600

2350

3600

50

1600

Capital 700 Depreciation

1200

2490

2600 Depreciation

390

20,810

20,810

`

Total

29,800

`

Total

29,800

Adjustments:

` `

2210

`

Final Accounts

183

Solution:

`

`

`

`

6000 To Purchases To Wages

1000 50

1050 8950 24,000

24,000

500 400 300 450 100

350 250

To Interest on capital

450 6500 9250

`

`

9250

`

4500

`

4400 1000

50 500 Capital Interest on capital

9000

2900

450

100

6500

Contd.

184

Financial Accounting for Hotels 4000 Depreciation 20,500

Total

3600 20,500

Debit `

Printing

400

Credit `

225

27,175

21,705

` ` 25. 3. ` ` 40.

Final Accounts

185

Solution:

7670 30 Purchases

225 1500 65

30 1075

5700 3000 Printing

225

190 445 200 Total

`

22,940

`

22,940

`

`

3000 To Purchases

30

Contd.

186

Financial Accounting for Hotels

12,830

12,830

25

445

Fitting

65 1075 35

1110

To Printing

225 190

490

40

150 200 1775

`

1775

`

`

35

`

30

5700 Capital Net loss

7670

Prepaid Insurance

40

490

225 Depreciation

25

200 1500

10,980

10,980

187

Final Accounts

`

`

`

`

Solution:

`

`

`

`

To Purchases 250 To Wages

6000 1600

66,590

66,590

600 2660

Contd.

188

Financial Accounting for Hotels 400 650

To Depreciation on Furniture

100 200 1900

To Depreciation on P&M

2500 500 7160 16,670

`

16,670

`

`

2430

`

4000

500 Capital 7160

Furniture Depreciation

100

Depreciation

2500

Tools

1900

5000 Depreciation

90,800

2000

500

4500 90,800

189

Final Accounts

`

`

Adjustments:

` 2006. `

` 250.

` date. Solution:

`

`

To Purchases

`

`

2000

1,68,060

1,68,060

9000

2000

4000

1000

2000 200

Contd.

190

Financial Accounting for Hotels

To Depreciation on Furniture

250

900

1700 300 1600 2200 1500

37,260

`

37,260

`

`

4200

`

200

900

Capital 5000

Interest on capital

1500

Furniture and Fittings

2600

Depreciation

250

2350

300 Depreciation 59,410

59,410

`

`

191

Final Accounts

Discount

500

` 200. 3. Prepaid insurance ` 200. ` 7000. Solution:

`

`

`

`

To Purchases 1500

7000 3000

Contd.

192

Financial Accounting for Hotels

1,09,000

1,09,000

9000 200

9200 2500

500

3000

300

200 To Depreciation on Motor Veh

2000 500 1000 1500 700 300 300 3500 3400

To Net 35,500

`

`

35,500

`

`

2000 200

200

9500 2000

1000 7000

Capital 5000

3500 6000

Contd.

Final Accounts

193

Motor Vehicles Depreciation

2000

Depreciation

300

57,400

57,400

`

Insurance

1410

`

194

Financial Accounting for Hotels

` ` ` June 2005. ` 6000. Solution:

`

`

``

To Purchases

`

3750 2910 6000

To Wages

6,86,670

6,86,670

7920

5970

7260 To Insurance

1410 360

To Depreciation on Furniture

1050 512

To Depreciation on P&M

210

2760

Contd.

195

Final Accounts

9300

78,810

`

78,810

`

`

`

7740 360

Capital 3720

Furniture Depreciation

512

Depreciation 6000

Depreciation 3,75,620

3,75,620

2005 `

`

196

Financial Accounting for Hotels

Adjustments:

` ` ` Solution:

`

`

`

`

To Purchases To Wages

7200

88,360

88,360

4740

1320

934 1315

105 550

305 1035 900

135

Contd.

197

Final Accounts 700

9551 19,280

`

19,280

`

`

`

2500

3300 305

5795

700

Capital 2000 2000 9551

9340 Depreciation

934

50,281

50,281

`

`

198

Financial Accounting for Hotels

Fire Insurance

490

2,04,950

2,04,950

` 125 ` 240 ` 400 ` Solution:

`

To Purchases

`

`

`

1760

Contd.

199

Final Accounts To Wages 4370 720

1,18,860

1,18,860

4670 1990 To Depreciation on P&M

1427

2470

600

500

240 To Fire Insurance

120

490

400

125

100

365 140

To Depreciation on F&F

125 4176 625

32,980

`

``

32,980

`

`

400

240 1270

Contd.

200

Financial Accounting for Hotels 125

Capital

Depreciation

625

Depreciation

1427

4176

1250 Depreciation

125

1,19,128

1125 1,19,128

`

Insurance

1320

Furniture

3350

4,00,600

`

4,00,600

201

Final Accounts

`

` 400. 5. Insurance Prepaid ` 120. Solution:

`

`

`

`

To Purchases 6050 To Wages 3050

2,40,600

2,40,600

2600 To Depreciation on P&M

5200

500

5200 400 To Insurance Prepaid Insurance

1320 120

1200

1020 2200

3220 1045 7435 41,500

41,500

202

Financial Accounting for Hotels

`

`

`

`

1930 500

19500

2200 1045 7435 400 Prepaid Insurance

120

Depreciation

5200

Furniture

3350

1,87,535

1,87,535

`

Deposits

4000

Furniture

600

`

203

Final Accounts

`

`

` 50 is prepaid.

` 3. Interest ` paid.

` ` 1000. ` 4500.

Solution:

`

`

`

`

3000 To Purchases

1000 2000

4500 5500 18,500 100

5500

2200

500

300

100

400

500 Prepaid Insurance

50 200

210 650

500 1000 700 2060 6110

`

`

2000

6110

`

`

1500

Contd.

204

Financial Accounting for Hotels 100

3000

2000

5000

2500

1000

4000

100

210

200

4500

300

Deposit

4000

Prepaid Insurance

Capital

50

1400 2060

Depreciation Furniture 17,860

`

` 100.

17,860

`

` ` 500.

600

Final Accounts

205

Solution:

`

`

`

`

To Purchases To Wages

1300 500 2000

1,35,000

1,35,000

1200 Postage and 400 500 4600

To Depreciation on Furniture

250

To Depreciation on P&M Insurance Prepaid Insurance

4000 700 100

600

400 1030 630 3620 35,800

35,800

206

Financial Accounting for Hotels

`

`

`

9000

`

6200

5000 500 1030 9000 Depreciation on P&M Depreciation on Furniture

Prepaid Insurance

100

4000 250

Capital 5000

Furniture

5000

3620 1,11,370

1,11,370

`

`

Final Accounts

Telephone Insurance

207

35 30

Total

58,930

Total

58,930

` 5200. ` 200. ` 30. ` 10.

` 300. Solution:

`

`

To Purchases

`

`

930 550

30

5200

110

52,270

52,270

100

To Telephone

1400

370

35

130

Contd.

208

Financial Accounting for Hotels 600 200

To Depreciation on Furniture

13

To Depreciation on P&M

500

To Depreciation on M V

300

To Insurance Prepaid Insurance

30 10

20 635

250 300 250

300

105 7202 12,060

`

12,060

`

`

5200 130

``

40 5070

650

560

4500

200

300

30

105 Prepaid Insurance

4095 10 5200 720

Contd.

Final Accounts

209

5000 Depreciation on P&M Capital

4000

Furniture

700

Depreciation on Furniture

500

4500

260 13

247

3300 7202

Motor Vans Depreciation on M V 16,362

Objective Type Questions

1200 300

900 16,362

210

Financial Accounting for Hotels

Review Questions

Final Accounts

Exercises `

`

` `

`

2007

`

`

` ` ` ` ` ` ` ` ` ` `

7000

2400 1000

2000 3000 1300 6000

211

212

Financial Accounting for Hotels

` ` ` ` ` ` `

`

Freight

3000

1250 2500 2700

`

Discount

2,40,800

1300

2,40,800

Adjustments:

` ` 1500. ` ` 600. (

Final Accounts

`

Furniture

1300

Discount

700

Freight

325

1,25,345 Adjustments:

` 14150.

1200

1,25,345

213

214

Financial Accounting for Hotels

`

` 175.

` `

`

`

Wages 5000 Discount

1000

3,06,500

3,06,500

Adjustments:

`

4. Wages are preparied ` 1000. ` 2500. `

`

`

`

` `

` `

` 5670 ` 12460.

Final Accounts

`

215

`

`

Adjustments:

`

`

`

`

Discount

` 125 Fire insurance.

`

3200

4,01,400

4,01,400

216

Financial Accounting for Hotels

Adjustments:

` 40120. `

`

`

Furniture

`

1300

Discounts Insurance

200 1000

1,00,700 Adjustments:

` 9900.

` 200. ` 250.

1,00,700

Final Accounts

`

`

Insurance

600

Furniture

9000

5,40,500

5,40,500

Adjustments:

` 3. Prepaid insurance ` 100. ` 500. ` 1500.

Adjustments:

` 2. Insurance prepaid ` 70. `

`

` 150.

217

218

Financial Accounting for Hotels

`

Wages

`

9915

Insurance

570 2,51,681

2,51,681

B 3000

6000

Nil

D 5200

7300

Nil Nil Nil

7200

9000

Contd.

Final Accounts 7000

Nil

Nil

4400

Nil

Nil

(` 5200 1600 4200 6000 Prepaid Insurance

Food Purchases Wages 4200 3400 2400

depreciation. `

(`

219

220

Financial Accounting for Hotels

(`

(`

3542

Insurance

Interest 1,67,2120

1,67,2120

Final Accounts

Adjustments:

`

`

`

(`

(`

636 264

326

Wages 192

392

3144 1156 990 Furniture and Fittings

2920 200

Purchases 350 1074 2640 360 2000 54,012

54,012

Contd.

221

222

Financial Accounting for Hotels

` `

(`

Mr. Vernon

5000

Mr. John

2500

(`

Wages

6360 2640

3260

1920 3920

9900

Contd.

Final Accounts

2000 Purchases

3600

Total

5,56,640

5,56,640

Adjustments:

` ` `

(`

(`

1500 4700 1700 Prepaid insurance

2400 1300

Contd.

223

224

Financial Accounting for Hotels

5000

Wages

Food Purchases

Maintenance

5600

Insurance 9500

depreciation.

` `

` 1700. `

` 5100.

`

` 4.5

` 100 each 50

7.5

05

2.5

0.5

4

` 100 each

Contd.

225

Final Accounts 01

Vehicles

2

01

5.5

02

1

15

0.5

15

2 0.5

04 7.5

`

Adjustments: `

`

` `

226

Financial Accounting for Hotels

9

Chapter

Accounting Systems in Hotels

Learning Objectives

This chapter would help the reader to understand:

INTRODUCTION

In ordinary commercial houses, the double entry system of bookkeeping is used in its traditional form. But the nature of hotel business is different from that of other commercial houses in many respects. The following points distinguish the two types of businesses: 1. In hotels, credit is allowed to all guests except a few who appear to be of doubtful nature. As their stay is uncertain and they can check out at any moment, their account is kept ready and whenever they wish to check out, the bill is presented for payment. 2. The hotel business is such where both cash and credit transactions with an individual guest follow each other pretty rapidly.

Accounting Systems in Hotels

227

3. The hotels have to do the job of manufacturer (because they have to prepare dishes) and that of a retailer by selling the dishes according to the requirements of the guests sometimes newspapers, magazines, etc. Therefore, control in hotels is more complicated. 4. In hotels, some departments deal with both cash and credit, but others for credit alone. Thus, cash is collected and credit is allowed at many points. Under such cases, the internal control of receipts and accounts receivable is the most important part of hotel accounting. 5. The accounts of hotels are maintained in a way to ensure that all revenue is accounted for and that all stock in hand is correct. This eliminates wastage and keeps a check on misappropriation of goods. In hotels, the tabular or analytical system of accounting is used. It is the only successful method to get the analysed and up-to-date information about cash receipts and payments, goods purchased and sold, and services rendered by various departments. DEPARTMENTAL ACCOUNTS IN HOTEL

bar, etc. While preparing the departmental accounts, the expenses and incomes are to be allocated to various departments on a particular basis. Table 9.1 shows the various expenses and their basis of allocation. Table 9.1 Expenses and their Basis of Allocation Expenses

Basis of Allocation

1. Expenses incurred specially for a particular department

Charged to the department concerned

2. Expenses on purchases (import duty, octroi, freight, etc.)

Net purchases (excluding inter-departmental purchases)

3. Expenses on sales (selling commission, bad debt, R.B.D, discount allowed, reserve for discount of debtors, sales tax, carriage outward, advertisement)

Net sales (excluding Inter-departmental sales)

4. Expenses on building (rent and rates, repairs and insurance)

Floor space occupied

5. Lighting and heating

Meter reading/light points/space occupied

6. Power

occupied

7. Expenses on machines (depreciation, repairs)

Value of machines/occupied

8. Insurance premium

Value of the subject matter insured

Contd.

228

Financial Accounting for Hotels

9. Labour welfare expenses (recreation expenses, canteen expenses, etc.)

Number of workers in each dept.

10. Worker’s compensation insurance

Ratio of wages in each dept.

11. Other expenses Interest on capital Interest on debentures GM’s salary Audit fees, Director’s fees Bank charges, Legal charges

Basis of sales/Cost of sales Quantity of goods sold/equally

Similarly, some of the incomes are to be allocated on the following basis: Incomes

Basis of Allocation

1.

Discount received, reserve, for discount on creditors

Net purchases

2.

Commission earned on sales

Net sales

3.

Other incomes Dividend received Transfer fees

Equally

UNIFORM SYSTEM OF HOTEL ACCOUNTING (USHA)

The management of hotels having branches or running a chain of hotels would like to compare the

Uniform System of Hotel Accounting (USHA).

results of operation. In 1925, the Hotel Association of New York City appointed a committee of hotel accountants

The system designed has since been adopted by the American Hotel Motel Association and has come to be known as “the Uniform System of Accounts for Hotels”. It is widely used throughout the hotel industry and has served as the basis for formulating other uniform systems in the hospitality service industries. Other systems include the uniform system of accounts for Restaurants sponsored by the National Restaurant Association, the “Uniform System of Accounts for Clubs” sponsored by the Club Managers Association, and the Uniform System of Accounts for Hotels, Motor Hotels Association sponsored by the American Hotel and Motel Association (AHMA), currently known as American Hotel and Lodging Association (AHLA).

Accounting Systems in Hotels

229

Advantages of USHA 1. Each hotel (whether small or large) can select the head of account according to its requirements and eliminate such items as are not needed by it. 2. By this system, hotels (with branches) can easily compare each head of income and expenditure of one branch with other branch or branches.

Sheet of all branches. some other branch of the hotel or seeks a change in a hotel where also the uniform system of accounting is in practice. For introducing the USHA, the activities of a hotel are divided into two main departments. Departments. The Operated Departments are further divided into two parts—Major Revenue Earning Departments and Minor Revenue Earning Departments. Under the former one, we can keep Rooms, Food and Beverage Departments and in the latter category, we can keep Telephone, Guest Handling, etc. The assets and liabilities are also analysed in detail. example, Account No. 1 to 11 can be representing the Revenue Earning Departments, Account No. 12 to 16 can be kept for the Expenditure or Overheads and Account No. 17 onwards can be assigned for Assets, Liabilities and Equities. The Income Statement under USHA

The income statement is management’s primary report. It shows the kind and amount of revenue, the net increase or decrease in revenue as the result of operations. To provide the maximum managerial content in the income statement, three basic criteria should be considered in its organization, viz. responsibility, controllability and allocability. Responsibility refers to grouping revenue and expense items, so that the performance of the individual responsible for that particular segment of the operation can be measured and judged. Controllability refers to the extent to which costs can be controlled in the income statement. The Allocability refers to meaningfully allocating costs as closely as possible to the related sale. within the income statement, it is necessary to give greater weight to one or the other of the criteria to a restaurant, thereby indicating that it should be deducted directly from restaurant revenue. However, this expense is not controllable by, or the responsibility of, the restaurant manager, thus suggesting that it should be deducted at a later point in the statement. The organizational format of the hospitality service industries’ income statement places greatest emphasis on responsibility and controllability, separating the statement essentially into three levels. direct departmental expenses. For example, the income statement for a hotel will show rooms

230

Financial Accounting for Hotels

department revenue less direct expenses (clerks, maids, and laundry); food department revenue less the food cost, preparation cost and service cost, and beverage departmental sales less the cost of beverage sold and labour cost. heads. of income statement consists of the overhead expenses which are controllable by the manager. In the hospitality service industries, they are referred to as deductions from income and can be thought of as controllable and un-allocable expenses. These include administrative and general expenses, advertising and promotion, heat, light and power and repairs and maintenance.

has control over revenue realized and costs incurred to this level. in the income statement is that of non-controllable expenses. These include rent, municipal taxes, insurance, interest, depreciation and amortization.

Basic Structure of the Income Statement

Departmental Revenue Less: Departmental Expenses (Direct) Gross Operating Income

xxxxx xxx xxxx

Less: Controllable Un-Allocable Expenses

xx xxx

Less: Fixed charges (Rent, Taxes, Insurance, Interest, Depreciation, etc.)

xx xxx

Fromat of Income Statement Under USHA Income Statement for the Year Ended__________

Departments/Particulars

Schedule No.

Sales

Cost of Sales

Payroll and Related Exp.

Other Exp.

Loss

Operated Depts. Rooms

B-1

Food and Beverage

B-2

Casino

B-3

Telephone

B-4

Garage-parking lot

B-5

Contd.

Accounting Systems in Hotels Golf Course

B-6

Golf Pro-Shop

B-7

Guest laundry

B-8

Swimming Pool

B-9

Tennis

B-10

Other Operated Depts.

B-

Rental and Other Income

B-11

231

Gross Operating Income Undistributed Operating Expenses Administrative and General Expenses

B-12

Marketing

B-13

Guest Entertainment

B-14

Property Operation, Maintenance and Energy Costs

B-15

Fixed Charges Property Taxes

B-16

Insurance

B-16

Interest

B-16

Rent

B-16

Depreciation and Amortization

B-16

Gain/Loss on Sale of Property

B-16

Income before Income Tax Less: Income Tax

B-16

Net Income

ANALYSIS OF THE INCOME STATEMENT Analysis of Revenue Department:

Rooms

1. (Gross) Guest Room Sales: Income from Guest Rooms credited at quoted rates and rented for part-day occupancy a full day, week or longer.

232

Financial Accounting for Hotels

2. Rebates: This represents reduction in tariff allowed to certain categories of clientele as a result of trade practice enforced by the management and will certainly be a guiding factor for determining future sales strategy. 3. (Net) Guest Room Sales: Total Gross Sales of Guest Rooms less rebates will constitute reconciled with the room sales Register and then posted to the Net Room Sales A/c in the Income Ledger. 4. Public Rooms Sales: Income from rental of Public Rooms not used for functions involving food or beverages sales like exhibitions, cultural shows, meetings, etc. will be posted separately in the Income Ledger. Note: Treatment for discounts, allowances and complimentary accommodation would be dealt with separately. Department:

Food and Beverages

Food Sales (Net) = Gross – Less: Rebates and Allowances 1. Boarding Charges: according to the type of plan such as American, Continental, MAP, etc. 2. Chance Food Sales: Income from Sales of A la Carte food including tea, coffee, chocolate, oval tine, milk shakes, etc. in various restaurants and Room Service during breakfast, lunch dinner, tea and snack time and including also sale from regular or special Table d’Hote or Buffet Menus offered to the Guests. 3. Banquet Catering Sales: Income from sale of food during functions and parties booked in the banquet and party rooms or even in deluxe suites or outside the hotel premises to celebrate an occasion. 4. Contract Catering Sales: Income from supplying to any outside agency on a regular basis Income by way admission charges recovered with a view to defraying expenses on music and entertainment. Beverage Sales

Sales of mineral water like bisleri, soda, lemonade, coca cola, fanta, cidar, etc. juices, squashes, syrups, etc. Liquor and Tobacco Sales

Beer Sales (Indian): Sales of beer ale and stout. Wines and Spirits Sales (Indian): Sale of Indian wines, whisky, gin, rum and brandy and liquors. Wines and Spirits Sales (Imported): Sales of imported wines, whisky, brandy and liquors. Corkage: Income from levying of corkage on bottles brought by guests from outside. Note: The above beverage sales will also be recorded department wise.

Accounting Systems in Hotels

233

Cigar and Cigarette Sales: Income from sale of Cigars and Cigarettes and smoker’s accessories in various restaurants and banquet rooms, Room Service Department, etc. Department:

Minor Revenue Producing and Operating Departments

Swimming pool – Cabanas – Baths

1. Membership subscription/forms: Monthly income from membership subscription for health club, swimming pool and other recreational facilities. 2. Cabanas Lockers and Equipment Rentals: Daily income from letting out on hire cabanas and lockers and recreational accessories to members of the health club and also guests. 3. Swimming Pool and Sauna Bath Booking Charges: Daily income from admission charges levied on guests. 4.

Hourly charges of masseurs, chiropodists, instructor, coaches, etc. in lieu of rendering professional services.

Other Operating Departments

1. 2. 3. 4. 5. 6.

Guest laundry income Guest transportation income Telephone, telex, phonograms and trunk calls income Retail stores sales Income from housing servants and pets Income from personalized services (like baby-sitters, stenographers, chaperons, house detectives, etc).

Department:

Other Income

Rentals

1. Shop rentals 3. Other rentals (rent from lobby space, show cases, window displays, etc.) Sundry Recoveries

4. Recoveries from guests on account of breakages 5. Recoveries from employees on account of breakages 6. Salvage (revenue from sale of old news papers, magazines, empty bottles, containers, incidental articles and obsolete material and equipment) 7. Recovery or debts written off 8. Miscellaneous income Non-Operating Income

2. Interest on other investments 3. Share transfer fees

234

Financial Accounting for Hotels

5. Excess provision written back 6. Consultation/management services fees Analysis of Cost of Sales Department: Food and Beverages Food purchases

1. Purchases of Perishables and Dairy Produce: fruits, eggs, milk, butter, cheese as are used in the preparation of various food dishes and which require low temperature storage. 2. Purchase of Perishables and Dairy Produce: All items of consumable nature including state and which are to be used in the preparation of various menu items and which require room temperature for storage Beverage purhcases 1.

Cost of bisleri, soda, lemonade, coca-cola, fanta, cider, juices, squashes and syrups

Purchase of Liquor and Tobacco

2. Purchase of beer: Cost of beer, ale Stout, etc. 3. Purchase of wines and spirits (Indian): Cost of Indian wines, whisky, gin, rum, brandy, and liquors 4. Purchase of wines and spirits (imported): Cost of imported wines, whisky, brandy and liquors 5. Purchase of cigars and cigarettes: Cost of imported cigars, cigarettes and other smoker’s accessories (Treatment for adjustments in respect of opening and closing inventories as well as credit to separately.) Other Operating Departments

1. Swimming Pool and Cabana Expenses: Cost of operating supplies and accessories such as swimming costumes, caps, robes, lotions, oils, powders, tonics, soaps, games accessories, nets, balls, etc. 2. Guest Laundry Charges: Cost of laundering, pressing dry-cleaning garments of guests. 3. Guest Transportation Expenses: Cost of petrol, oil, servicing on guest transportation. 4. Guest Telephone Charges: Cost of local calls, trunk calls, telex, and phonogram charges incurred on guests. 5.

: Cost of various items purchased in hotel retail stores for resale to guests.

Accounting Systems in Hotels

235

Analysis of Payroll and Related Expenses Salaries and Wages (Payroll Register)

1. Basic + DA 2. Extra salaries and wages including overtime 3. Leave pay if any Related Expenses

4. 5. 6. 7. 8. 9. 10. 11.

Uniforms Staff meals Staff welfare expenses Contribution to employees state insurance Gratuity Bonus Medical expenses Other allowances

Rooms:

Superintendent of Services, Asst. Manager—Lobby; Telephone Supervisors, Telephone Operators; Doorman, Heal Bell Captain, Watchmen, Hall Porter, Pageboys, Cloak Room Attendants; Drivers; Housekeepers; Room Boys; Sweepers; linen Girls, Linen Clerks, Tailors, Washermen (Dhobis). Food and Beverages: Catering Manager—Asst. Managers In-charge of Bars, Restaurants, Banqueting, Room Service, Asst. Stewards; Rooms Service Order Takers, Dining Room Waiters and Banquet Waiters.

Chef-de-cuisine, Sous Chef-Continental Cooks, Assistant, Cooks helpers Head Indian CookTandoor Cooks-Asst. Indian Cooks-Helpers. Head Pantry Man, Asst. Pantry Man, Pastry Cook, Asst. Pastryman, Barman, Asst. Barman, Asst. Storekeeper, Helpers Food Cost Control, Cost Analysis, Secretaries, Stenographers. Swimming Pool-cabanas-baths: Asst. Superintendent; Health Club and Swimming Pool Booking Clerks; Attendants; Masseurs, Coaches; Chiropodists. Other Operating Department (Minor Revenue Producing)

Payments to telephone, telex operation; Laundry operators; Transport Department Staff, Drivers or Techniques, Payments to Salesmen in the Retail Stores in hotel premises, Payments to Baby Sitters, Chaperons, House Detectives, House Physicians and Public Stenographers. Adminstrative and General:

236

Financial Accounting for Hotels

Ledger, Supplies Ledger, Expense Ledger, Petty Cashiers, Receiving Clerks, Restaurant/Dining Room/Bar Cashiers cum-bill Clerks, Inventory Clerk. Marketing, Advertising, Publicity, and Sales Promotion

Sales and Marketing Director Graphic Designers, Secretary, Stenographers. Heat, light and power: Maintenance Engineer, Assistant Maintenance Engineers, Electricians, Plumbers, Boiler man-A/C, Plant operators-General Helpers and Mechanics. Repairs and maintenance: Carpenters, Painters, Masons, Polishers, Upholsterers, Tin-Smiths, Lock-smiths, Welders, Fitters. Analysis of Other Expenses Rooms Consumable Supplies

1. Cleaning Supplies: Cost of acids, ammonia, alcohol or any other type of cleaning agent much as detergent deodorant disinfectant, insecticides, etc. Cost of polish, soaps, powders, polish cloth, rags, mops, brushes, brooms, buckets, dust pans, sprayers and other cleaning 2. Guest Supplies: Cost of facial tissues, toilet paper, garment bags, candle sticks, guest soap, soap suds, bathing caps coat hangers, magazines, matches, sewing kit, shoe cloths, stationery folder along with writing accessories, brush and comb, newspapers, wastepaper, wastepaper baskets, disposal boxes, shaving mugs, etc (Issued to housekeeping department.) 3. Flowers and Decoration Expenses: balloons, paper or thermo-coals, decorative craft work, displayed in Guest rooms, lobby, lounge, corridors, passages and pathways. 4. Bed Linen: Cost of bed sheets, pillow cases, blankets, bed covers or bed spreads, towels, bath mats, shower curtains issue to guest rooms. 5. Crockery and Glassware: Cost of water tumblers, ash trays, water jugs, glower vases, Other Operating Expenses

6. Music and Entertainment: Cost of purchasing LP records, tapes and other accessories necessary for channel music to be piped throughout the hotel. 7. Laundry Charges: Cost of laundering (house) bed linen issued to guest rooms. 8. Hire Charges: Cost of rental paid for any item hired from outside agency to meet the requirement of the hotel in connection with conferences, conventions, exhibitions, fairs conducted on the company’s premises.

Accounting Systems in Hotels

237

9.

Cost of services rendered by them in giving room business.

10.

Cost of establishment charges pertaining to instant reservation systems and fees payable for use of national and/or international communication networks.

Food and Beverage Consumable supplies

1. Cleaning Supplies: Cost of all items as mentioned under similar title but issued to food and beverage department which includes stores, kitchen, pantries, D/rooms, bar and restaurants, etc. 2. Paper Supplies: Cost of menu cards, wine-lists, tent cards, paper plates, paper cups, paper doilies, paper serviettes, cardboard boxes, twine, wrapping paper, butter paper, wax paper, silver foils, tooth picks, matches, table reservation cards, etc. 3. Flowers and Decoration Expenses: Cost of all items as mentioned under similar title, but displayed in various bars, Restaurants, dining rooms, etc. 4. Table Linen: Cost of table cloths, table mats, serviettes, doilies, buffet tables runners, decorative borders. 5. Crockery and Glassware: Cost of bowls, cups, saucers, jus, plates, pots, tumblers, ceramics, cut glasses. 6.

Cost of table or service forks, knives, spoons, tongs, cruet sets, ash trays, holders, service trays, ladles, sauce boats, bowls, serving dishes, stands, ice buckets, etc. made out of EPNS, aluminum or SS.

7. Kitchen Utensils: Cost of bowls, pans, pots, molds, kettles, bins, jars, containers and all cooking accessories, such as sieve, knives, choppers, boards, blocks, tongs, skimmers, beaters, mixtures, squeezers, mincers, can openers, made out of white metal, SS, aluminum, brass, plastic or wood and issued to kitchen, pantries, stores etc. 8. Bar supplies: cost of Cork screws, mixers, shakers, strainers, swizzle sticks, cocktail napkins, peg measures, measuring scale, or measuring jugs, stoppers etc. 9. Kitchen Fuel: Cost of charcoal, wood, cooking gas, steam or any other fuel used in the process of cooking Other operating expenses

10. Music and Entertainment: Cost of hiring band boys and cabaret artists; also hiring of any musical instrument or buying of musical manuscripts. 11. Laundry charges: Cost of laundering (house), table linen issued to restaurants, bars and dining rooms. 12. Hire Charges: Cost of rental paid for any item hired from outside agency to meet the requirements of any banqueting function or wedding reception and parties. 13. Entertainment tax

238

Financial Accounting for Hotels

14. Purchase and sales tax 15. License and excise fees 16. Freight, octroi and cartage Swimming Pool–Cabanas-Baths-Squash Courts Consumable supplies

1. Cleaning Supplies: Cost of all items as mentioned under similar title but issued to swimming pool, cabanas, baths, and squash or badminton courts. 2. Guest Supplies: Cost of all items as mentioned under similar title, but issued to swimming pool, cabanas, baths, squash or badminton courts. 3. Bed Linen: Cost of all items as mentioned under similar title, but issued to swimming pool, cabanas, baths, squash or badminton courts. 4. Crockery and Glassware: Cost of all items as mentioned under similar title, but issued to swimming pool, cabana, baths, squash or badminton courts. Other operating expenses 5. Laundry Charges: Cost of laundering linen issued to swimming pool, cabanas, baths, etc. 6. Hire Charges: Cost of rental paid for any item hired from outside agency to meet the requirements of the swimming pool, health club, squash courts, etc. Administrative and General

1. Printing and Stationery: Cost of all printed vouchers, cash memos, receipts, forms, records, account cards, folders, statements, reports, books utilized by employees of the pencils, gums, rubber bands, stamps, stamp pads, staples, foot rules, typing ribbons, etc. 2. Subscriptions to Trade Associations: Membership dues for FHRAI, etc. 3. Subscription to periodicals: Subscription due for newspapers, trade journals, trade magazines, and technical books. 4. Training and Conference Expenses: Fees payable for training staff at technical Institutes as also fees payable to various institutions for staff participating in conventions, seminars, conferences, courses, etc. 5. Motor Car and Transportation Expenses: Cost of petrol, oil, motor car accessories incurred for normal upkeep of hotel administration facilities. 6. Cost of taxi hire, bus, and train charges for local travel within the city limits. 7.

Cost of travel by car, bus train or air incurred by any staff who on duty is expected to visit any other city in or outside India and return back to his own station.

8.

Same as above except that the travel is undertaken by the directors.

Accounting Systems in Hotels

239

9. Postage and Telegram Expenses: Cost of mailing letters, registered parcels, sending franking machine, if any. 10. Telephone and Telex Charges: Cost of local and long distance calls as also the cost of maintaining a private automatic telephone exchange and rental charges of exchange including all extensions. Management fees

11. Legal Charges: Cost of professional service rendered by company’s lawyers, advocates or solicitors on any legal matters. 12. Auditor’s Remuneration: Remuneration payable to company’s auditors in their capacity as internal and external auditors as also their capacity as consultants on taxation matters. 13. Consultancy Charges: Cost of professional services rendered by experts in giving advice organizations. 14. Director’s Remuneration: Remuneration payable to part-time or full time directors who assist in the day-to-day running of the hotel operations. 14 a. Miscellaneous expenses

15. 16. 17. 18. 19. 20.

Bank charges Cash discounts Commission to other agencies Bad debts Charities, donations and contributions Registration and license fees expenses

Lodging House Import Excise Registrar of companies and such other local authorities 21. Sundry expenses Marketing, Advertising and Sales Promotion

1. 2. 3. 4. 5. 6. 7.

Designing fees and other services paid to professional Cost of advertising in press and trade journals Cost of advertising in cinema slides, television and radio Cost of printing brochures, circulars and house magazines Cost of printing posters, placards, and sign boards Cost of making and distribution gifts, complimentary and souvenirs Cost of entertaining VIPs in the hotel premises and outside

240

Financial Accounting for Hotels

Heat, Light and Power (Energy Cost)

1. 2. 3. 4. 5.

Electricity charges Fuel (liquid), e.g. petrol, L.D.D. etc. Gas charges Solid (fuel-coal, coke, wood, etc.) Water and conservancy charges.

Repairs and Maintenance

1. Repairs to Building and Property: Cost of all building materials including steel, cement, sand, bricks, woods, paint, lime, glass, tiles, and all other hardware accessories like locks, stoppers, door closers, etc. that would be necessary to keep the building and the property in good shape. 2. including repairs in all pipelines both covering supply and drainage. 3. Repairs to Plant and Machinery: Cost of all accessories, spare parts, tools to carry out the repairs departmentally or on job contract basis to keep all the items of plant and machinery in good working conditions, such as boilers, lifts, pumps, kitchen and laundry equipment, generating sets, air conditioners, cold storage, etc. 4. Garden Repairs and Maintenance: Cost of earth, plants, sapling, seeds, and all garden accessories and tools required to keep the garden lawns and the general landscaping in good and proper shape. 5.

Cost of all wood, formica, metal, cane, and rexene leather and such other materials required to keep

6. Electrical Stores: Cost of electric bulbs, tube lights, fuses, capacitors relays, switches, elements, thermostats, etc. 7. Sundry repairs and Maintenance: Cost of minor repairs of sundry nature not falling in any of the above categories such as contract for disinfecting, cleaning of chandeliers, heavy curtains, carpets, etc. Fixed Overhead Expenses Rent, rates, property taxes and insurance

1. Ground rent or lease rent 2. Municipal/property taxes

Interest 4. Loan interest – short term 5. Loan interest – long term

Accounting Systems in Hotels

6. Loan interest – Public deposits 7. Bank overdraft interest Depreciation

8. Depreciation (normal and additional) 9. Initial depreciation 10. Development rebate Other provisions and adjustments 11. Provision for income taxes 12. Capital adjustments gains or losses VARIOUS SCHEDULES UNDER USHA ROOMS

Schedule B-1 `

Transient–regular Transient–group Permanent Extra Room Revenue Total Revenue Less: Allowances

`

xxx xxx xxx xxx xxx xxx xxx

Less: Expenses Salaries and Wages Total Payroll and Related expenses (B) Other Expenses China, glassware and Linen Commissions Contract cleaning Laundry and Dry Cleaning Operating supplies Other Operating Expenses Reservation Expense Uniforms Total Other Expenses(C)

xxx xxx xx xx xx xx xx xx xx xx xxx

Total Expenses (B + C)

xxx

Departmental Income (Loss)(A– [B + C])

xxx

241

242

Financial Accounting for Hotels FOOD AND BEVERAGE

Schedule B-2 `

Food Beverage Total Revenue Less: Allowances

`

xxx xxx xxx xxx

Other Income

xxx xxx

Cost of Sales Cost of Food consumed Less: Cost of Employees’ Meals Net Cost of Food sales Cost of Beverage sales Net Cost of Sales

xx xx xx xx xxx xxx

Less: Expenses Salaries and Wages Total Payroll and Related expenses (B) Other Expenses China, glassware and Linen Contract cleaning Laundry and Dry Cleaning Licenses Music and Entertainment Operating Supplies Other Operating Expenses Uniforms Total Other Expenses (C)

xxx xxx xx xx xx xx xx xx xx xx xxx

Total Expenses (B + C))

xxx

Departmental Income (Loss)(A– [B + C])

xxx

Accounting Systems in Hotels CASINO

Schedule B-3 `

Black Jack Dice Roulette Other Table Games

xxx xxx xxx xxx

Slot machines

xxx

`

xxx Less: Expenses Salaries and Wages Total Payroll and Related expenses (B) Other Expenses Cash Overages and Shortages Commission Complimentary Rooms Food Beverage Travel Other Contract cleaning Credit and collection charges Dry cleaning Licenses and taxes Operating Supplies Other Operating Expenses Provision for doubtful accounts Travel expenses Uniforms Total Other Expenses (C)

xxx xxx xxx xx xx

xx xx xx xx xx xx xx xx xx xx xx xx xx xx xxx

Total Expenses (B + C)

xxx

Departmental Income (Loss) (A– [B + C])

xxx

243

244

Financial Accounting for Hotels TELEPHONE

Schedule B-4 `

Local Long Distance Service Charges Commissions—Local Commissions—Long Distance Less: Allowances

`

xxx xxx xxx xxx xxx xx xxx

Cost of Calls Local

xx

Long distance

xx

Total Rental of equipment

xxx xx

Depreciation of telephone equipment

xx

Total Cost of Calls

xxx xxx

Less: Expenses Salaries and Wages

xxx xxx

Total Payroll and Related expenses (B)

xxx

Other Expenses Equipment Charges Other Operating Expenses Printing and Stationery Uniforms Total Other Expenses (C)

xx xx xx xx xxx

Total Expenses (B + C)

xxx

Income (Loss) on calls through switchboard (A– [B + C])

xxx

Accounting Systems in Hotels GARAGE- PARKING LOT

Schedule B-5 `

Parking and Storage Income Merchandise Other Service Income Total Revenue

`

xxx xxx xxx xxx xxx

Less: Allowances

xxx Less: Cost of Sales

xxx xxx

Less: Expenses Salaries and Wages

xxx xxx

Total Payroll and Related expenses (B)

xxx

Other Expenses Licenses Management fee Operating Supplies Other Operating Expenses Reservation Expense Uniforms Total Other Expenses(C)

xx xx xx xx xx xx xxx

Total Expenses (B + C)

xxx

Departmental Income (Loss) (A– [B + C])

xxx

245

246

Financial Accounting for Hotels GOLF COURSE

Schedule B-6 `

Greens fees Golf car rentals Member ship fees Other rentals Golf club cleaning and repair

`

xxx xxx xxx xxx xxx

Less: Allowances

xx xxx

Less: Expenses Salaries and Wages Total Payroll and Related expenses (B) Other Expenses Golf car batteries Golf car repairs and maintenance Laundry Operating Supplies Other Operating Expenses Tournament expenses Total Other Expenses (C) Total Expenses (B + C) Income (Loss) before course maintenance (A– [B + C]) Course Maintenance Expenses: Salaries and Wages Total Payroll and Related expenses Other Expenses Fertilizer, insecticides and top soil Gasoline and Lubricants Other Operating expenses Repairs and maintenance Machinery and Equipment General Sand and cinders Uniforms Water Total Other Expenses

xxx xxx xxx xx xx xx xx xx xx xxx xxx xxx xxx xxx xx xx xx xx xx xx xx xx xxx

Total Course Maintenance expenses

xxx

Departmental Income (Loss)

xxx

Accounting Systems in Hotels GOLF PRO SHOP

Schedule B-7 `

` xxx xxx

Less: Allowances

xxx Less: Cost of merchandise sold

xxx xxx

Other Income Cleaning and repairing of guests clubs

xx

Less: Expenses Salaries and Wages

xxx xxx

Total Payroll and Related expenses (B)

xxx

Other Expenses Commission on merchandise sold Operating Supplies Other Operating Expenses Total Other Expenses(C)

xx xx xx xxx

Total Expenses (B + C)

xxx

Departmental Income (Loss) (A– [B + C])

xxx

247

248

Financial Accounting for Hotels GUEST LAUNDRY

Schedule B-8 `

xxx

Less: Allowances

xxx Less: Expenses Salaries and Wages

xxx xxx

Total Payroll and Related expenses (B)

xxx

Other Expenses Laundry Supplies Operating Supplies Other Operating Expenses Uniforms Total Other Expenses (C)

xx xx xx

xxx

Total Expenses (B + C)

xxx

Departmental Income (Loss) (A– [B + C])

xxx

Guest Laundry (Where only one laundry is operated)

Less: Allowances Net Revenue Less: Cost of Laundering

xx xx xx

Departmental Income (Loss)

xx

Accounting Systems in Hotels SWIMMING POOL

Schedule B-9 `

Rentals

`

xxx xxx xxx

Less: Allowances

xxx

Less: Expenses Salaries and Wages

xxx xxx

Total Payroll and Related expenses (B)

xxx

Other Expenses Chlorine and other supplies Fuel (heating pool) Laundry Linen Operating Supplies Other Operating Expenses Repairs and Maintenance Water Total Other Expenses(C)

xx xx xx xx xx xx xx xx xxx

Total Expenses (B + C)

xxx

Departmental Income (Loss) (A– [B + C])

xxx

249

250

Financial Accounting for Hotels TENNIS

Schedule B-10 `

Court fees Rentals

`

xxx xxx xxx

Less: Allowances

xxx

Less: Expenses Salaries and Wages

xxx xxx

Total Payroll and Related expenses (B)

xxx

Other Expenses Court Maintenance Nets and Tapes Operating Supplies Other Operating Expenses Tournament Expenses Total Other Expenses (C)

xx xx xx xx xx xxx

Total Expenses (B + C)

xxx

Departmental Income (Loss) (A– [B + C])

xxx

Accounting Systems in Hotels RENTALS AND OTHER INCOME

Schedule B-11 `

`

Space Rentals Stores

xxx

Clubs Others

xxx xxx Total Rentals

Less: Concessions Barber Shop Beauty Shop Checkrooms and Washrooms Cigar and News-stand Fountain and Gift Shop Guest Laundry Public stenographer Restaurant Swimming pool, cabanas and baths Transportation Valet Total Concessions Less: Commissions Auto rentals Flowers Garage and Parking lot Photography Radio and television Sundries Taxicabs Telegraph

xxx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx

Total Commissions Add: Incomes Interest Income Vending Machines Cash Discounts earned Salvage Total Income Departmental Income (Loss)

xx

xx xx xx xx xxx xxx

251

252

Financial Accounting for Hotels OTHER OPERATED DEPARTMENTS

Schedule B `

Services Sale of merchandise

`

xxx xxx xxx

Less: Allowances

xxx

Less: Cost of merchandise sold

xxx xxx xxx

Less: Expenses Salaries and Wages

xxx xxx

Total Payroll and Related expenses (B)

xxx

Other Expenses China and glassware Contract services Laundry Linen Operating Supplies Other Operating Expenses Uniforms Total Other Expenses(C)

xx xx xx xx xx xx xx xxx

Total Expenses (B + C)

xxx

Departmental Income (Loss) (A– [B + C])

xxx

Accounting Systems in Hotels ADMINISTRATIVE AND GENERAL EXPENSES

Schedule B-12 `

Salaries and Wages

xxx xxx

Total Payroll and Related expenses (A)

xxx

Other Expenses Cash overages and shortages Commission on credit card charges-net Credit and Collection charges Data processing expense Donations Insurance General Internal audit expenses Internal communicating systems Loss and damage Management fees Miscellaneous Postage and telegrams Printing and stationery Professional fees Provisional fees Provision for doubtful accounts Trade association dues Trade publications Travelling expenses Trustees’ and registrar’s fees Uniforms Total Other Expenses (B)

xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xxx xxx

253

254

Financial Accounting for Hotels MARKETING

Schedule B-13 `

`

Sales Salaries and Wages

xxx xxx

Total Payroll and Related expenses Operating Supplies Other Operating Expenses Postage and Telegrams Trade Shows Travel and entertainment

xxx xx xx xx xx xx

Total Sales (A) Salaries and Wages

xxx xxx xxx

Total Payroll and Related expenses

xxx

Exchange (due bills) Other Operating Expenses Outdoor Print Magazines–Group and Travel Magazines–other Newspapers Production Radio and Television

xx xx xx xx xx xx xx xx xx

Salaries and Wages

xxx xxx

Merchandising

Total Payroll and Related expenses In-hours graphics Other Selling aids Point of Sale material Total Merchandising (C)

xxx xx xx xx xxx

Accounting Systems in Hotels Marketing (Continued)

Schedule B-13 (Continued) `

Public relations and publicity Salaries and Wages Total Payroll and Related expenses Civic and Community projects Fees for outside services Other Operating expenses Photography

`

xxx xxx xxx xx xx xx xx

Total Public relations and Publicity (D)

xxx

Research Salaries and Wages

xxx xxx

Total Payroll and Related expenses Guest History Other Operating Expenses Outside service Total Research (E) Fees and Commissions Advertising agency Franchise fees Hotel representatives Marketing fees Other Operating expenses Total Fees and Commissions (F) Other selling and promotion expenses Association dues Complimentary guests Credit card costs–internal Direct mail Total other selling and promotion expenses (G) Total Marketing [A + B + C + D + E + F + G]

xxx xx xx xx xxx xx xx xx xx xx xxx xx xx xx xx xxx xxx

255

256

Financial Accounting for Hotels GUEST ENTERTAINMENT

Schedule B-14 `

`

Guest Entertainment Salaries and Wages

xxx xxx

Total Payroll and Related expenses

xxx

Other Expenses Contract entertainment Contract Musicians

xx xx

Complimentary Rooms Food Beverage Films Licenses Other operating expenses Piano rental and tuning Stage decorations and props Total Other Expenses Total Guest Entertainment

Minimums Net Guest Entertainment

xx xx xx xx xx xx xx xx xxx xxx

xx xxx

Accounting Systems in Hotels PROPERTY OPERATION, MAINTENANCE AND ENERGY COST Schedule B-15 ` Property operation and maintenance Salaries and Wages Total Payroll and Related expenses Building Curtains and draperies Electrical and mechanical equipment Elevators Engineering supplies Floor covering Furniture Ground and landscaping Operating supplies Painting and decorating Refrigeration supplies Removal of waste matter Uniforms Miscellaneous Total Total Property operation and maintenance Credits Sales Charged to other departments Net property operation and maintenance Energy costs Electric current Fuel Steam Water Total energy costs Credits Sales Charged to other departments Net energy costs Total property operation, maintenance and energy costs

`

xxx xxx xxx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xxx xxx xx xx xx xx xx xx xx xx xx xx xx xx

257

258

Financial Accounting for Hotels RENT, PROPERTY TAXES AND OTHER MUNICIPAL CHARGES AND INSURANCE Schedule B-16 `

`

Rent Real estate (Land and hotel building)

xxx

Electronic data processing equipment Other rentals

xxx xxx

Total Rent (A) Property Taxes and Other Municipal charges Real Estate Taxes Personal Property Taxes Utility Taxes Business and Occupation taxes Other Total property taxes and other municipal charges (B) Insurance on building and contents (C) Total Rent, Property Taxes, Municipal Charges and Insurance (A + B + C) Interest Expense Notes payable First mortgage Other long-term debt Other Interest Total Interest expense Depreciation And Amortization Depreciation Building and improvements Other Amortization Leaseholds and improvements Pre-opening expenses Other Total Depreciation and Amortization

xxx xx xx xx xx xx xxx xx xxx xx xx xx xx xx xx

xx xx xx xx xx xx

Accounting Systems in Hotels

259

Format of Balance Sheet Under Usha Assets

Prev. Yr.

Curr. Yr

Liabilities and Equity

Current Assets

Current Liabilities

Cash

Notes Payable

— House Banks

Prev. Yr.

Curr. Yr.

Accounts Payable

Demand Deposits

Current maturities on longterm debt

Deposit

Unearned Income

Marketable Securities

Federal and state income taxes

—

— Receivables

Accrued Liabilities

Accounts Receivables-Trade

Salaries and Wages

Notes Receivables

Interest

Other

Taxes—other than income

Total Receivables

Other Current liabilities

Less: Allowances for doubtful accounts

Total Current Liabilities

Inventories

Long-Tem Debt, less: Current Portion

Prepaid expenses

Other Non-Current Liabilities

Other Current Assets

Deferred Income Taxes

Total Current Assets

Minority Interest Shareholder’s Equity Preferred Stock

Others

Common Stock

Property and Equipment

Additional Paid-in Capital

Land

Retained Earnings

Building

Less: Common Stock in Treasury

Contd.

260

Financial Accounting for Hotels Leasehold and leasehold improvements

Total Shareholder’s equity

Construction in progress

Commitments and Contingencies

Furniture and Equipment Less: Accumulated depreciation and amortization China, Glassware, silver, linen and uniforms Other Assets Security Deposits Cash Surrender value in Life Insurance, net Deferred expenses Pre-opening expenses Other Total Assets

Total Liabilities and Equity

ILLUSTRATIONS

Sales – Restaurant ` 5,00,000 Cost of Sales – Restaurant – ` 2,00,000 Wages and Salaries – Restaurant – ` 90,000 Repairs and Maint. – Restaurant – ` 25,000 Gas and electricity Rent and rates Depreciation Postage and telegram Advertising Laundry and cleaning

Banquet – ` 3,00,000 Bar – ` 2,00,000 Banquet – ` 1,20,000 Bar – ` 75,000 Banquet – ` 35,000 Bar – ` 20,000 Banquet – ` 18,000 Bar – ` 7000 ` 30,000 70,000 60,000 15,000 30,000 5000

Unallocated expenses are to be apportioned according to the following basis: (a) Gas and electricity – Restaurant 50%, Banquet 30%, Bar 20%. 50%, Banquet 40%, Bar 10%. (c) All other expenses are to be apportioned in the ratio of turnover.

Accounting Systems in Hotels

261

Solution:

Particulars To Cost of Sales

Rest.

Banquet

2,00,000 1,20,000

Bar

Total

Rest.

Banquet

Bar

Total

75,000

3,95,000 By Sales 5,00,000 3,00,000 2,00,000 10,00,000

To Wages and Sales

90,000

35,000

20,000

1,45,000

To Repairs and Maintenance

25,000

18,000

7000

50,000

To Gas and Electricity

15,000

9000

6000

30,000

To Rent and Rates

35,000

28,000

7000

70,000

To Depreciation

30,000

24,000

6000

60,000

To Postage and Telegram

7500

4500

3000

15,000

To Advertising

15,000

9000

6000

30,000

2500

1500

1000

5000

Administration exp.

20,000

12,000

8000

40,000

Loss

60,000

39,000

61,000

16,0000

To Laundry and Cleaning

Particulars

5,00,000 3,00,000 2,00,000 10,00,000

5,00,000 3,00,000 2,00,000 10,00,000

31.3.2004 from the details showing the maximum amount of information possible: : Rooms Food Liquor and tobacco Other Income

` 1,40,000 1,11,800 85,000 10,400

262

Financial Accounting for Hotels

Purchases: Food Liquor and tobacco

` 43,400 49,300

Stock (1.4.2003) Food Liquor and tobacco

1740 6920

Stock (31.3.2004) Food Liquor and tobacco

2200 8000

Wages: Rooms Food Liquor and tobacco

12,300 31,480 16,980

China, glass and linen: Rooms Food Liquor and tobacco

2800 4120 3700

Heat, light, power: General Repairs and maintenance Depreciation Administration expenses Sales advertising and promotion Rates Sundry expenses

3620 24,400 15,000 10,900 7600 19,800 14,300

Apportion the following expenses: (a) Repairs and Maintenance Rooms – 50% Bar – 10% (b) Total administrative expenses on the basis of sales to various departments.

12,200

12,300 860

4120

2440 4830 3510

1740

6920

Liq.and Tobacco 8000

31,480 16,980

42,940 48,220

2200

45,140 56,220

43,400 49,300

Food

2440

450

7320

3620

3672

327

3700

2668

594 429

228

–2568

4847 3500

1860

–2887

Total 60,760

91,160

4480

10,620

24,400 15,000 10,900 7600 19,800 88,180

14,300 33,47,200

Rooms

Food

Liq.and Tobacco

Other

Total

1,40,000 1,11,800 85,000 10,400 3,47,200

Accounting Systems in Hotels

85,000 10,400

Other

Solution:

To Repairs and Maintenance 6048

2800

To Depreciation

4395

6375

2447

8193

4605 1,11,800

Particulars By Revenue

Particulars

To Op. Stock Add: Purchases

Less: Closing Stock To wages To China, Glass, Linen

To Administration expenses

7984

3065

To heat light and power

To Sales Advertising and Promotion

85,442

5766

To Rates To Sundry expenses

1,40,000

Rooms

263

264

Financial Accounting for Hotels

Double. K Hotel Income Statement

Revenue

Rooms

Food and Bev.

5,00,000

5,00,000

2000

10,02,000

1,80,000

1000

1,81,000

1,20,000

1,30,000

400

2,50,400

40,000

45,000

100

85,100

3,40,000

1,45,000

500

4,85,500

Cost of sales

–

Payroll and related exp. Other direct exp. Departmental Income Undistributed Exp.

Payroll and Related Exp.

Gift Shop

Total

Other Exp.

Administration and general

60,000

30,000

90,000

Marketing

45,000

25,000

70,000

Property operation and maintenance and energy cost

30,000

40,000

70,000

Insurance

10,000

10,000

Depreciation

80,000

80,000

1,85,000

3,20,000

1,35,000 Income before income tax

1,65,500

Income tax

50,000

Net Income

1,15,500

Indirect expenses will be allocated on the basis of number of employees. Department No. of Employees Rooms 55 Food and Beverage 70 Gift Shop 01 You are required to prepare a fully-allocated income statement using a single allocation base approach to cost allocation. Solution: Double. K Hotel income Statement Particulars To Cost of Sales

Rooms F. and B. 1,80,000

Gift Total Shop 1000

Particulars Rooms F. and B.

1,81,000 By Sales

Gift Total Shop

5,00,000 5,00,000 2000 10,02,000

Contd.

Accounting Systems in Hotels To Payroll and rel. exp.

1,20,000 1,30,000

400

2,50,400

To Other direct exp.

40,000

45,000

100

85,100

To Adminis-tration and general

39,285

50,000

715

90,000

To Marketing

30,555

38,888

557

70,000

To Property Operation and Maintenance and Energy Cost

30,555

38,888

557

70,000

4365

5555

80

10,000

To Depreciation

34,920

44,444

636

80,000

Income Tax

21,825

27,777

398

50,000

–60,552 –2443

1,15,500

To Insurance

1,78,495

5,00,000 5,00,000

2000 10,02,000

265

5,00,000 5,00,000 2000 10,02,000

4. The following balances were extracted from the accounts of the High Mountain Hotel on 31 December 1992. Prepare the Income Statement in accordance with USHA. ` Sales: Rooms Food and Beverage Telephone Transport Payroll and related Exp.: Rooms Food and beverage Transport Telephone Administrative and general Property maintenance Marketing Cost of Sales: Telephone Rooms Food and beverage

3,00,000 2,00,000 20,000 12,500 10,000 20,000 15,000 5000 25,000 12,500 10,000 5000 NIL 80,000

266

Financial Accounting for Hotels

` 10,000 25,000 5000 2500 5000 12,500 2500

Other Expenses: Food and beverage Rooms Transport Telephone Administration and general Property maintenance Marketing Other Income: Rentals and others

50,000

Other Fixed Expenses: Rent, rates and taxes Depreciation

10,000 10,000

Solution: High Mountain Hotel Income Statement [USHA] for the Year Ended 31st Dec. 1992 Cost of Sales

Payroll and Related Exp.

Schedule No.

Sales

Rooms

B-1

3,00,000

nil

10,000

25,000

2,65,000

Food and Beverage

B-2

2,00,000

80,000

20,000

10,000

90,000

Casino

B-3

Telephone

B-4

20,000

5000

5000

2500

7500

Garage-parking lot

B-5

12,500

–

15,000

5000

(7500)

Rental and Other Income

B-11

50,000

–

–

–

50,000

5,82,500

85,000

50,000

42,500

4,05,000

Departments/Particulars

Other Exp.

Loss

Operated Depts.

Gross Operating Income Undistributed Operating Expenses Administrative and General Expenses

B-12

25,000

5000

Marketing

B-13

10,000

2500

Guest Entertainment

B-14

Contd.

Accounting Systems in Hotels Property Operation, Maintenance, and Energy Costs

B-15

267

12,500

12,500

(67,500)

47,500

20,000

3,37,500

Fixed Charges Rent

B-16

10,000

Depreciation and Amortization

B-16

10,000

Add: Gain on Sale of Property

B-16

(20,000) + 25,000

Net Income

3,42,500

5. From the following particulars of Ritz Continental Hotel, prepare the Income Statement for the year ended 31st December 1995 in accordance with USHA. ` Net Sales Rooms F&B Telephone Minor Operated Depts. Cost of sales F&B Telephone Minor Operated Depts. Payroll and Related Exp. Rooms F&B Telephone Minor Op. Depts. Admn and General Marketing Property Maintenance

`

16,50,000 15,40,000 55,000 35,000 5,50,000 40,000 20,000 2,60,000 4,00,000 25,000 6000 1,50,000 45,000 55,000

Other Expenses Rooms F&B Telephone Minor Operated Depts. Administrative and General Marketing Property Maintenance Energy costs Fixed Charges Rent Property Tax Insurance Interest Depreciation Income Tax

1,65,000 1,70,000 3850 2250 1,20,000 65,000 60,000 80,000 40,000 50,000 35,000 75,000 1,65,000 85,000

Solution: Ritz Continental Hotel Income Statement for the Year Ended 31st Dec. 1995 Departments/Particulars

Schedule No.

Sales

B-1

16,50,000

Cost of Sales

Payroll and Related Exp.

Other Exp.

Loss

2,60,000

1,65,000

12,25,000

Operated Depts. Rooms

–

Contd.

268

Financial Accounting for Hotels

Food and Beverage

B-2

15,40,000

5,50,000

4,00,000

1,70,000

4,20,000

Telephone

B-4

55,000

40,000

25,000

3850

(13,850)

Other Operated Depts.

B-

35,000

20,000

6000

2250

6750

32,80,000

6,10,000

6,91,000

3,41,100

16,37,900

Gross Operating Income Undistributed Operating Expenses Administrative and General Expenses

B-12

1,50,000

1,20,000

Marketing

B-13

45,000

65,000

Property Operation, Maintenance, and Energy Costs

B-15

55,000

1,40,000

(75,000 ) 10,62,900

Fixed Charges Property Taxes

B-16

50,000

Insurance

B-16

35,000

Interest

B-16

75,000

Rent

B-16

40,000

Depreciation and Amortization

B-16

1,65,000

Income before Income Tax Less: Income Tax

(3,65,000) 6,97,900

B-16

Net Income

85,000 6,12,900

6. Prepare an Income Statement for ABC Hotel in accordance with USHA, based on the following ledger balances for the year ended 30th April, 2005. Also prepare a Balance Sheet as on that date. ` Accounts Receivable – (Net of allowance for doubtful accounts of ` 3000) Accounts Payable Administrative and General – Payroll – Others Telephone – Cost of Calls Room Sales Food and Beverage Sales Telephone Sales

1,20,000 1,55,000 50,000 97,000 20,500 7,80,000 5,50,000 43,000

Accounting Systems in Hotels

Advertising and Sales Promotion – Others Repairs and Maintenance – Payroll – Others Energy Costs Accumulated Depreciation Investments Store Rentals Interest Expense Other Income Rooms-Payroll Rooms – Guest Supplies Rooms-Linen and Laundry Telephone-Payroll Telephone – Other Guest Entertainment – Other Depreciation Prepaid Insurance Land Building Furniture and Equipment Cash Loss on sale of Land Income Tax Expense Fire Insurance Real Estate Taxes Income Tax Payable Bonds Payable Bad Debt Expense Accrued Expense Inventories Common Stock (4,00,000 shares of Re.1 each) Dividends payable (Representing the only dividends declared during the year Ended April 30 2005) Retained Earnings Food and Beverage – cost of sales Food and Beverage – Payroll Food and Beverage – Other

269

50,000 40,000 20,000 40,000 3,50,000 30,000 20,000 1,10,000 40,000 1,50,000 15,000 50,000 28,000 2500 2000 80,000 6000 3,50,000 15,00,000 1,00,000 65,000 30,000 70,000 10,000 45,000 14,000 10,00,000 3000 55,000 1,05,000 4,00,000

50,000 1,82,000 2,00,000 1,80,000 70,000

270

Financial Accounting for Hotels

Solution: ABC Hotel Income Statement for the Year Ended 30th April 2005 Cost of Sales

Payroll and Related Exp.

Schedule No.

Sales

Rooms

B-1

7,80,000

–

1,50,000

65,000

5,65,000

Food and Beverage

B-2

5,50,000

2,00,000

1,80,000

70,000

1,00,000

Telephone

B-4

43,000

20,500

28,000

2500

(8000)

Rentals and Other Income

B-

60,000

–

–

–

60,000

14,33,000

2,20,500

3,58,000

1,37,500

7,17,000

Departments/Particulars

Other Exp.

Loss

Operated Depts.

Gross Operating Income Undistributed Operating Expenses Administrative and General Expenses

B-12

50,000

97,000

Advt and Sales Promotion

B-13

–

50,000

Guest Entertainment

B-14

Repairs and Maintenance

B-15

Energy Cost

B-15

2000 40,000

20,000 40,000 (2,99,000)

14,33,000

2,20,500

4,48,000

3,46,500

4,18,000

Fixed Charges Insurance

B-16

10,000

Interest

B-16

1,10,000

Real estate taxes

B-16

45,000

Depreciation

B-16

80,000

Bad debts

B-16

3000

Loss on sale of land

B-16

30,000

Property Taxes

B-16

70,000 (3,48,000)

Net Income

14,33,000

2,20,500

4,48,000

6,94,500

70,000

Accounting Systems in Hotels

271

Balance Sheet as on 30 April 2005 Assets

`

`

Current Assets

Liabilities and Equity

`

`

Current Liabilities

Cash

65,000

– House Banks

Notes Payable Accounts Payable

1,55,000

Current maturities on long term debt

Demand Deposits

10,00,000

– Time Deposits and Unearned Income Marketable Securities – Receivables Accounts Receivables-Trade

1,20,000

Federal and state income taxes

14,000

Accrued Liabilities

55,000

Salaries and Wages

Notes Receivables

Interest

Other

Taxes- other than income

Total Receivables

Other Current liabilities

Less: Allowances for doubtful accounts

Total Current Liabilities

Inventories

1,05,000

Long-Tem Debt, less: Current Portion

Other Non-Current 6000 Liabilities

Prepaid Insurance Other Current Assets

Deferred Income Taxes

Total Current Assets

Minority Interest 30,000

Shareholder’s Equity Preferred Stock

Others

Common Stock

Property and Equipment

Dividends payable

Land Building

3,50,000 15,00,000

Retained Earnings Add:

4,00,000 50,000 1,82,000 70,000

2,52,000

Contd.

272

Financial Accounting for Hotels

Leasehold and leasehold improvements

Total Shareholder’s equity

Construction in progress

Commitments and Contingencies

Furniture and Equipment Less: Accumulated depreciation and amortization

1,00,000

(3,50,000) 16,00,000

China, Glassware, silver, linen and uniforms Other Assets Security Deposits Cash Surrender value in Life Insurance, net Deferred expenses Pre-opening expenses Other Total Assets

19,26,000

Total Liabilities and Equity

19,26,000

7. Several accounts from the Hilton Hotel’s General ledger that pertain to the rooms department are listed below. Sales Transient- Regular Commission Linen Expenses Wages Operating supplies Other Revenues Laundry

` 1,00,000 1000 1000 15,000 1500 2000 3000

Salaries Uniforms Sales-Transient Groups Payroll Taxes Contract Cleaning Allowances-Rooms Other Expenses

Prepare a Rooms Department Schedule following USHA.

` 10,000 500 50,000 2000 1800 500 1800

Accounting Systems in Hotels

273

Solution: HOTEL HILTON ROOMS

Schedule B-1 `

`

Transient – regular Transient – group Extra Room Revenue Total Revenue Less: Allowances

1,00,000 50,000 2000 1,52,000 500

Less: Expenses Salaries and Wages

25,000

Payroll Taxes Total Payroll and Related expenses (B) Other Expenses Commissions Contract cleaning Laundry and Dry Cleaning Linen Expenses Operating supplies Other Expenses Uniforms Total Other Expenses (C)

2000 30,000 1000 1800 4200 1000 1500 1800 500 11,800

Total Expenses (B + C)

41,800

Departmental Income (Loss)(A– [B + C])

1,09,700

8. Prepare an Income Statement of F&B Department of Hotel Torino as on 31st December 1995 from the following information given below: Food Sales Allowance: Food Beverage Cost of Sales Food Beverage Salaries and Wages

` 5,55,000

1650 935 1,95,000 90,000 1,40,000

China, glassware, Linen Cleaning Expenses laundry Expenses Licenses Band and music Operating Supplies Other Operating Expenses

` 8250 5500 4950 3850 45,000 14300 3500

274

Financial Accounting for Hotels

Solution: FOOD AND BEVERAGE

Schedule B-2 `

Food Beverage Total Revenue

5,55,000 2,20,000 7,75,000

Less: Allowances Food Beverages

1650 935

2585 7,72,415

Cost of Sales Cost of Food consumed Cost of Beverage sales

1,95,000 90,000

Net Cost of Sales

2,85,000 4,87,415

Less: Expenses Salaries and Wages

1,40,000 27,500

Total Payroll and Related expenses (B) Other Expenses China, glassware and Linen Contract cleaning Laundry and Dry Cleaning Licenses Music and Entertainment Operating Supplies Other Operating Expenses Total Other Expenses (C)

1,67,500 8250 5500 4950 3850 45,000 14,300 3500 1,35,350

Total Expenses (B + C))

3,02,850

Departmental Income (Loss) (A– [B + C])

1,84,565

Accounting Systems in Hotels

275

Objective Type Questions 1. Fill in the blanks: (a) ______ Banquets, Bar, etc.

(c) Under USHA, ______ refers to grouping revenue and expense items, so that the performance of the individual responsible for that particular segment of the operation can be measured and judged. (d) Under USHA, _____ refers to the extent to which costs can be controlled in the income occurs. (e) Under USHA, _____ refers to meaningfully allocating costs as closely as possible to the relates sale.

Review Questions 1. 2. 3. 4. 5. 6. 7.

What is department accounting? How is accounting in hotels different from other industries? What is uniform system of hotel accounting? What are the advantages of USHA? Write a short note on uniform system of accounting. Give a list of undistributed operating expenses as per USHA. Draw a neat from at the sales summary when a restaurant sales book is maintained. How is the double entry completed when a restaurant sales book is maintained? 8. In an income statement based on USHA, what information is reported in the operated departments section? 9. When clear cut methods have been prescribed in the basic accounting systems, why is it that the uniform systems for hotels have been specially devised for hotels? 11. What do you mean by schedules under USHA? 13. What is gross operating income?

Exercises of Barista Restaurant: ` Stock on 1st January 2002 Food Beverages

17,400 14,700

`

276

Financial Accounting for Hotels

Purchases Food Beverages

35,000 30,000

Sales Food Beverages

60,000 40,000

Wages Bar Rent, Tax, and Insurance Sundries Salaries Lighting Discount Advertising Carriage

2700 9390 3600 3000 2100 2220 3680 2340

650

Adjustments:

1. Rent and insurance, sundries, lighting, salaries, and carriage are to be apportioned in the ratio 2:1. 2. Advertising to be divided equally. 3. Discount to be allocated on the basis of purchases and sales. 4. The stock on 31st December 2002 was: Food ` 16,740 and Beverages ` 12,050. of 2006: Sales Cost of Sales Rooms 7,31,120 – Food 4,07,740 38% Beverage 2,67,140 30% (a) For the above period, the sales have remained at the same total, so also the department cost of sales percentages. However, the composition of the total sales has changed to the following: Rooms ` 6,18,640, Food ` 4,35,860, Beverage ` 3,51,500. different sales value. 3. The Troika Catering Co. Ltd. operates an establishment consisting of: (a) Restaurant (b) Banquet Department (c) Bar

Accounting Systems in Hotels

277

The company operates a system of departmental accounts and periodically separate trading results are obtained for each department of the business. From the following information, you are required to prepare the company’s income statement for the year ended 31.12.2006: Sales:

Restaurant Banquet department Bar Cost of food and beverage sold: Restaurant Banquet department Bar Wages and Salaries: Restaurant Banquet department Bar Repairs and replacements: Restaurant Banquet department Bar Gas and electricity Rent and rates Depreciation Postage and telephone Advertising Laundry and cleaning

` 5,00,000 3,00,000 2,00,000 2,00,000 1,00,000 75,000 1,45,000 75,000 15,000 21,000 13,000 4000 30,000 60,000 70,000 5000 40,000 6000

Note: Expenses which cannot be allocated to particular department are apportioned as follows: (a) Gas and electricity: Restaurant 60% Banquet department 35% Bar 5% (b) Gas and electricity: Restaurant 60% Banquet department 30% Bar 10% (c) All other expenses are apportioned on the basis of turnover. 4. The following balances were extracted from the accounts of the Blue Moon Hotel at 31st December 2005. Prepar the Income Statement in accordance with the Uniform System of Hotel Accounting introduced by the AHMA.

278

Financial Accounting for Hotels

Rooms Department: Net Sales Payroll and related expenses Other expenses Food and Beverage Department. Net Sales Food and Beverage Cost Payroll and Related expenses Other expenses Telephone Department: Net Revenue Cost of Calls Payroll and Related expenses Other Expenses Transportation Department: Net Revenue Payroll and Related expenses Other Expenses Administrative and General: Payroll and Related expenses Other expenses Property Operation, Maintenance and Energy Cost: Payroll and Related expenses Other Expenses Marketing Department: Payroll and Related Expenses Other Expenses Other Fixed Expenses: Rent, Rates, Taxes Depreciation Other Income: Rentals and others

` 6,00,000 20,000 50,000 4,00,000 1,60,000 40,000 20,000 40,000 10,000 10,000 5000 25,000 15,000 10,000 50,000 10,000 25,000 10,000 20,000 5000 20,000 20,000 1,00,000

5. From the following information extracted from the books of Modern Hotel, you are required to prepare the Income Statement for the year ended 31st December 2005 in accordance with the Uniform System of Hotel Accounts:

279

Accounting Systems in Hotels

` Net Sales Rooms 13,14,000 Food and Beverage 14,00,000 Telephone 50,000 Other Operated Depts.: 30,000 Cost of Sales Food and Beverage 5,05,000 Telephone 58,000 Other Operated Depts.: 10,500 Other Expenses Rooms 1,57,700 Food and Beverages 1,60,500 Telephone 3500 Other Operated Depts. 2200 Administrative and General 1,05,800 Advertising and Sales Promotion 65,000 Repairs and Maintenance 62,300 Municipal Taxes and Insurance 20,200 Real Estate Taxes 1,48,000 Interest 70,600 Depreciation 1,84,700 Income Taxes 1,19,000

` Payroll and Related Expenses Rooms Food and Beverage Telephone Other Operated Depts.: Administrative and General Advertisement and Business Promotion Heat, Light and Power Repairs and Maintenance Other Income Store Rentals and Other Income

2,62,800 4,80,000 27,400 6300 1,31,600 30,800 15,700 64,700 39,400

6. Prepare a statement of Income and Expenses for APB Hotel in accordance with the USHA, based on the following ledger balances for the year ended September 30, 2005: ` Heat, Light and Power Payroll and Related exp. Garage/Parking Lot Other Expense Telephone – Net Sales Repairs and Maintenance Payroll and Related exp. Property Taxes Room – Sales Telephone – cost of calls

`

22,000

Fire Insurance

400 31,500

Marketing – Payroll and Related Exp. 1000 Repairs and Maintenance – Other Exp. 22,100

11,300 16,500

Store Rentals Rooms– Payroll Related Exp. Depreciation Exp. Food – Other Expenses

8,27,000 43,000

2400

18,000 2,14,000 1,38,000 44,000

280

Financial Accounting for Hotels

Garage/Parking LotPayroll related exp 600 Administrative and GeneralOther expenses 1,05,000 Garage/parking lotCost of Sales 28,000 Other Income 24,150 Food – payroll related Exp. 3,22,000 Beverage – Net Sales 2,09,200 Heat, Light and PowerOther Expenses 74,300 Garage/parking lot – net sales 32,100

Telephone – payroll related Exp. Interest expense Beverage – payroll Exp. Beverage – Cost of SalesTelephone – Other Exp. Marketing – Other Exp. Food – Sales Provision for Income Tax Food – Cost of Sales Beverage – Other exp.

14,000 67,000 40,900 1,23,000 1000 45,000 7,34,150 50% 3,13,000 9600

7. Prepare a Statement of Income and Expenses for XYZ Hotel in accordance with the USHA based on the following ledger balances for the year ended April 30, 2005: ` Net Sales Rooms Food and Beverage Telephone Rental and Other Income Cost of Sales Food and Beverage Telephone Other Expenses: Rooms Food and Beverages Telephone Rental and Other Income Administrative and General Advertising and Sales Promotion Repairs and Maintenance Rent, Rates and Taxes Interest Depreciation

`

Payroll and Related Expenses Rooms 3,99,639 Food and Beverage 8,65,619 Telephone 42,731 Rental and other Income 56,496 Administrative and General 2,23,359 7,60,010 Advertisement and Business Promotion 51,944 1,46,079 Repairs and Maintenance 1,09,082

23,04,931 22,23,562 1,26,771 1,62,488

1,66,309 2,37,385 3686 7186 1,76,609 1,29,860 1,78,464 1,16,864 2,30,152 2,49,158

8. From the following information of Blue Gen Hotel, you are required to prepare an Income

Accounting Systems in Hotels

Net Sales Rooms Food and Beverage Dept. Cigar Stand Transportation Guest laundry Telephone Other Items: Newspaper Advertisement Guest Supplies in Rooms Travel Agents commission on Room Rates Contract Cleaning (Rooms) Contract Cleaning (F&B Dept.) Electricity Charges Laundry Supplies Miscellaneous Expenses (Rooms) Miscellaneous Expenses (F&B) China and Glass (F&B) Decoration (Banquet Room) Stationery (Restaurant) Stationery (Cigar Stand) Food and beverage Consumed Petrol charges Silver–Rooms Ground Rent Guest laundry Bills Store Rentals Tobacco and Cigar consumed Stationery – Rooms Stationery – Transportation Stationery – Telephones Local call charges Repairs to Buildings Income from Concessionaires Garden Maintenance Postage and Telegram Conveyance and Traveling Accountancy Charges

` 6,00,000 3,70,000 30,000 60,000 30,000 31,000 25,000 26,000 30,000 17,000 3000 40,000 4500 40,000 4500 12,000 10,000 3500 1200 140,000 13,000 12,000 65,000 17,000 30,000 17000 3000 2500 1000 20,000 16,000 32,000 4000 2500 3000 4500

281

282

Financial Accounting for Hotels

Interest Menu Cards Bar Accessories Repairs and Maintenance to Plant Spares and Repairs to Cars Subscriptions to periodicals and Associations Rates and Taxes License Fees for Lodging License Fees for Boarding Insurance Depreciation Shop Rentals Salaries, Wages and Related Expenses Rooms Food and beverage Cigar Stand Transportation Guest Laundry Telephones Administrative and General Heat, Light and Power Repairs and Maintenance Advertising and Sales Promotion

3750 1500 3000 2750 1350 2500 27,500 3500 3500 12,000 25,000 32,000 90,000 65,000 3000 9500 6500 8000 52,000 16,000 7500 8000

9. Ron Curcio, the owner of Ron’s Resort has hired you to prepare a resort’s income statement for the year ended 31 December 2007. He has provided you with the balances of each of the general ledger accounts and has requested that you follow the format established in the USHA for the income statement. Vending machine revenues Employee meals, food department Cost of calls, telephone Ending Inventory, food Opening inventory, food Insurance Outdoor advertising Grounds and landscaping Purchases – food and beverage

` 819 443 22,820 15,386 18,395 3,000 12,121 12,000 1,34,999

Accounting Systems in Hotels

Depreciation Other selling expenses Other operating expenses – food Other operating expenses – rooms Electricity charges Rent Water charges Other operating expenses – Telephone Interest expenses

283

76,000 17,000 60,002 1,51,123 33,000 75,000 25,000 26,850 1,600

Rooms 10,75,000 Food and Beverage 4,20,000 Telephones 55,000 Salaries and Related Expenses: Rooms 1,78,000 Food and Beverage 1,05,000 Marketing 24,000 Property operation and maintenance 20,000 Energy cost 10,000 Telephone 20,000 Data processing 10,000 Transportation 10,000 Administration and General 15,000 Other Expenses: Administration and General 30,000 Transportation 15,000 Data processing 5,000 Tax rate 40% 10. From the following information, you are required to make an Income Statement in accordance with the format introduced by the American Motel and Hotel Association: Net Sales: Rooms Food and Beverage Telephone Other Operated Departments Cost of Sales: Food and Beverage Telephone Other Operated department

` 12,00,000 5,00,000 1,00,000 50,000 2,00,000 80,000 25,000

284

Financial Accounting for Hotels

Pay Roll and Related Expenses: Rooms Food and Beverage Telephone Other Operated department Administration and General Marketing Property Operation and Maintenance Other Expenses: Rooms Food and Beverage Telephone Other Operated department Administration and General Marketing Property Operation and Maintenance Energy Cost Other Items: Rent, Property Taxes Insurance

2,00,000 1,00,000 25,000 15,000 1,00,000 50,000 20,000 1,00,000 1,00,000 10,000 10,000 25,000 15,000 20,000 1,00,000 50,000 10,000

Depreciation and amortization 50,000 Income Tax Rate 40% 11. The Trial Balance of (Capital Items) Lancer’s Popular casual dining spot as on 31.12.2003 is as follows: Particulars Cash

Debit (`) 5000

Marketable Securities

10,000

Accounts Receivables

1,00,000

Allowance of Doubtful Debts accounts Food Inventory

5000 15,000

Prepaid Rent

5000

Prepaid Insurance

8000

Investments

Credit (`)

50,000

Contd.

Accounting Systems in Hotels Land

80,000

Building

4,20,000

Equipment

1,00,000

Accumulated Depreciation

1,00,000

Accounts payable

15,000

Accrued expenses

25,000

Long-term debt

285

3,00,000

Capital Stock

89,000

Share Premium

68,000

Retained earnings (1.1.2003)

61,000

Additional Information: 1. Dividends declared during 2003 totaled ` 30,000. Only ` 20,000 of the dividend declared in 2003 has been paid as on 31.12.2003. 2. Operations generated ` 8,00,000 of revenue for 2003. Expenses recorded totaled ` 6,50,000. Additional adjustments required are as follows: (a) The allowance for doubtful debts should be adjusted to 10% of accounts receivables. (b) Unrecorded depreciation expense for 2003 totals ` 41,000. (c) Income Taxes have not been recorded. Tax rate 40%. (d) Prepaid insurance or ` 8,000 is the premium paid for insurance coverage for 1.07.2003 to 30.06.2004. Prepare a balance sheet according to USHA. 12. Prepare an Income Statement of Room Department in respect of Hotel Glory for the month of January 2006. The required information are given below. Room Sales: ` Transient 9,93,900 Permanent 50,000 10,43,900 Allowances 2,700 Payroll and Related Expenses: Salaries and Wages 1,59,304 26,030 1,85,334

Other Expenses ` Contract Cleaning 3,200 Commissions 5,124 Linen 9,494 Laundry and Drycleaning 20,706 Operating Supplies 21,742 Reservations 9,288 Uniform 1,400 Others 8,126 13. The following balances were extracted from the accounts of the Dalmia Limited at 31st December 2003. Prepare the Income Statement in accordance with the Uniform System of accounting introduced by the AHMA.

286

Financial Accounting for Hotels

` Rooms Department: Net Sales Payroll and related expenses Other expenses Food and Beverage Department Net Sales Food and Beverage Cost Payroll and related expenses Other expenses Telephone Department Net revenue Cost of calls Payroll and related expenses Other Expenses Transportation Department: Net Revenue Payroll and related expenses Other Expenses Administrative and General Payroll and related expenses Other Expenses Property Operation, Maintenance and Energy Cost Payroll and related expenses Other Expenses Marketing Department Payroll and related expenses Other Expenses Other Fixed Expenses Payroll and related expenses Other Expenses Other Income Rentals and Others

12,00,000 40,000 1,00,000 8,00,000 3,20,000 80,000 40,000 80,000 20,000 20,000 10,000 50,000 30,000 20,000 1,00,000 20,000 50,000 20,000 40,000 10,000 40,000 40,000 2,00,000

14. From the following General Ledger sheet of a Hotel, prepare two schedules, namely Rooms and Food and Beverage, as per AHMA pattern and arrive at the departmental income.

Accounting Systems in Hotels

Debit (`)

Credit (`)

Revenues: Rooms – Transient – Regular

26,29,380

Rooms – Transient – Group

6,52,058

Rooms – Permanent

1,12,786

Rooms – Other

1,62,134

Food

11,46,350

Beverage

4,49,467

Other Income – Food

34,255

Interest Income

26,210

Vending Machines

39,316

Food Purchase Beverage Purchase Cost of Sales – Other (F&B) China, glassware

3,82,496 93,824 569 15,601 8916

Laundry (F&B)

6686

Licenses (F&B)

4456

Flatware

3901

Operating Supplies (F&B) Operating Supplies (Rooms)

49,032 1,09,257

Entertainment

35,660

Uniforms – F&B

13,372

Uniforms – Rooms

35,247

Other Expenses (F&B)

10,029

Inventory (Closing) – Food

59,292

Inventory (Closing) – Beverage

11,235

Allowances – Rooms

31,723

Allowances – Food

4566

Contd.

287

288

Financial Accounting for Hotels Allowances – Beverage

2681

Employee Meals

5708

Salaries and Wages – Rooms

4,96,973

Salaries and Wages – Food

2,83,502

Salaries and Wages – Beverage

94500 1,23,363 75,157 25,051

Commissions

38,771

Contract Cleaning

31,723

Guest Transportation

28,198

Laundry (Rooms)

24,674

Linen

7049

Other Income – Cover Charges

1142

Music (Restaurant and Bar)

Additional Information: Inventory (Opening)

35,660

Food Beverage

1,07,726 11,466

10

Chapter

Hotel Front Office Accounting

Learning Objectives

This chapter would help the reader to understand: Occasions to receive of Advance/Deposit Nuances of Guest Billing The methods of settlement of guests bills and care needed Raising of vouchers their authorization and posting balance, Basic Operating Ratios and night auditing procedure

to house accounts or city accounts

290

Financial Accounting for Hotels

RECEIVING OF ADVANCE/DEPOSIT

no show. walk-ins

scanty baggage

skippers.

Advance/Deposit Receipt HOTEL XYZ Receipt No.: __________

Date:_______________

Received with thanks ` _________ (Rupees ____________________________________________________) Towards deposit/advance from Mr./Ms. ________________________________________________________ Vide Reservation Reference No./Guest Registration No.___________________________________________

GUEST BILLING

Hotel Front Office Accounting

reduce:

Guest bill Weekly Bill

Vertical split: Horizontal split:

METHODS OF SETTLEMENT OF GUEST’S BILLS AND CARE NEEDED

incidentals

291

292

Financial Accounting for Hotels

Receipt HOTEL XYZ

Receipt No.: _____________

Date: ______________

Received with thanks _____________ (Rupees ___________________________________________________ ________________________________________________________________________________________) Towards part settlement/settlement in full No.: ________________________________ dated _______________ From Mr./Ms. _____________ Guest Registration No.: _____________ in cash/ __________________ Bank Cheque No.: _________________ dated ___________________

Hotel Front Office Accounting

293

Cash Settlements

In local currency In foreign currency

In travellers’s cheque

By personal cheques

By bank credit cards

By bank debit cards

Credit Settlements

Settlement by charge card

These are the cards issued by private agencies, work on the same genuineness, credit limit, authenticity, etc.

Settlement of corporate accounts

Normally credit is given to big corporate guests. There should be is risky to give credit without prior acceptance. Sometimes there the individual guest will have to pay. Proper care must be taken in verifying this kind of clauses. Then the consolidated bill enclosed with different POS bills need the signature of the guest.

Travel agent vouchers any other vouchers account settlement will apply here too.

294

Financial Accounting for Hotels

RAISING OF VOUCHERS, THEIR AUTHORIZATION AND POSTING VPO (Visitors Paid Out) or Guest Disbursement

Visitors Paid Outs

Allowance or Discount Voucher

Allowance/Discount Voucher Hotel XYZ Credit the account of _________________________________________________________________________ Guest Registration No. _______________ ` _______________ (Rupees________________________________ ________________________________________________________________________________________) towards __________________________________________________________________________________. Explanation/Remarks: _______________________________________________________________________

Hotel Front Office Accounting

295

Account Transfer/Correction

Example

VISITOR’S TABULAR LEDGER (VTL)

A ledger

guest ledger

city ledger.

guest ledger

transient ledger

Types of Postings

room’s ledger

visitors’ tabular ledger

296

Financial Accounting for Hotels

Vistors Tabular Ledger G. Regn. No. Name:

2999 Mr. Ramakanth

Arr. Date

20 Apr. 2007

Arr. Time

10.00 AM

Dep. Date

22 Apr. 07

Dep. Time

09.00 AM

Plan/Pax

CP/2

Rate Room No. Op. Balance Dr./(Cr.)

Total

2

` 2500 102 –1275

103

104

201 –1275

Debit Entries

Contd.

Hotel Front Office Accounting

Total: Op. Balance + Debit Charges

297

4950

4950

4950

4950

Credit Entries

Total: Credit entries Closing Balance: (A – B)

CITY LEDGER

non-guest ledger

298

Financial Accounting for Hotels

Format of City Ledger Company/Agency/Individual: XYZ Co. Ltd. A/c Date

CASH SUMMARY

Particulars

Ref. No.

Dr.

Cr.

Balance

299

Hotel Front Office Accounting

Cash Summary Statement

Shift No.:

Time: Advances/Deposits (Dr.)

Bill Settlements (Cr.)

(Cr.)

Cheque

Credit Credit Cash Cheque Voucher VPO Balance Card Card

F.O. Cahier’s Signature (Shift No.)

F.O. Cahier’s Signature (Shift No.)

Particulars

Ref. Cash No.

Date:

Chief Cashier FRONT OFFICE TRIAL BALANCE

300

Financial Accounting for Hotels

___________

Debit Particulars

`

`

Credit Particulars

`

`

VTL Charge

6425 4819 6425

1,70,494

1,70,494

Hotel Front Office Accounting

BASIC OPERATING RATIOS

Occupancy percentage:

Number of rooms sold ¥ 100 Number of rooms available Double Occupancy Ratio

Multiple occupancy ratio:

Number of rooms occupied by more than one guest Number of roooms occupied Average daily rate:

Average Room Rate

Rooms revenue Number of rooms sold Average rate per guest:

Rooms revenue Number of guests Foreigners to domestic visitors’ ratio: Number of Foreigners Total Number of Guests

301

302

Financial Accounting for Hotels

NIGHT AUDITING

Procedure

Hotel Front Office Accounting

N

A

ILLUSTRATION

`

20 Apr. 07

`

303

304

Financial Accounting for Hotels

21 Apr. 07

` ` ` ` 125 ` 22 Apr. 07 `

` ` ` `

Solution: Guest weekly bill

`

Day/Date Op. Balance Dr/Cr.

20 Apr.

21 Apr. –1275

22 Apr. 4950

Debit Entries

Contd.

Hotel Front Office Accounting

Total: Op. Balance + Debit Charges

3725

4950

3975

–1275

4950

3975

Credit Entries

Closing Balance: Total – Credit Entries

Objective Type Questions

305

306

Financial Accounting for Hotels

Review Questions

11

Chapter

Accounting Reports and Formats

Learning Objectives

This chapter would help the reader to understand:

INTRODUCTION

Like a manager in any other organization, a hotel manager also needs to know what is happening in the organization as well as outside that has a bearing on the operations of the hotel. With increase in size of the hotels and greater complexities in their operation, it is no longer possible to depend on any information sources for the required information. With more and more hotels forming part of multi-unit organizations or chain of hotels, a degree of decentralization at the operative level has taken place. This situation calls for a formal reporting system as a source of information and to enforce uniformity, accountability and control. The following are some of the reports and formats maintained for this purpose by hotels:

the expenses are listed along functional lines. Individual items of income and expenditure are

for the budget and the previous year are noted and analysed (Table 11.1).

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Financial Accounting for Hotels

Table 11.1 ___________ Hotel, ___________

Last Year `

%

Budget `

Particulars %

This Year `

%

Operating Income Rooms Food and Beverages Minor Departments Other Operating Income 100

100

Sub-total – Operating Income

100

Non-Operating Income Investment Income Other Non-operating Income Total Income Cost of Sales Food and Beverages Minor Departments Sub-total – Cost of Sales Gross Margin Expenses Employees Cost Other Operating Costs Administration Expenses Marketing Expenses Interest Depreciation Sub-total – Expenses

are indicated to trace the changes in the individual levels during the current accounting period (Table 11.2).

Accounting Reports and Formats

309

Table 11.2 ___________ Hotel, ___________

Budget `

Particulars Liabilities Share Capital Reserves and Surplus Owner’s Funds Term Loans – Secured Term Loans – Unsecured Current Liabilities Loans and Advances Trade Creditors Provisions

At the Close of Current Accounting Period

At the Start of the Current Financial Year

+/–

`

`

`

Total Liabilities Assets Fixed Assets (Gross) Less Accumulated Depreciation Net Fixed Assets Investments Loans and Advances Current Assets Inventories Receivables Prepaid Expenses Other Current Assets Cash and Bank Balances Total Assets

form of ratios (Table 11.3).

This report is prepared to anticipate funds required for operations as well as sudden opportunities for fruitful investment. It provides a forecast of cash receipts and disbursements over a threemonth period. Sales forecast for the projected quarter is also included in the statement so that cash

310

Financial Accounting for Hotels

Table 11.3 ___________ Hotel, ___________ Apd = Average per day Cumulative Last Year

Budget

This Month This Year

This Year Operating Statistics (Statistical Ratios) Rooms Total No. of Rooms Rooms Sold Guest Nights Spent Average Rate per Room Sold Average Rate per Bed Sold Income per Employee Double Occupancy Food and Beverages Food & Beverages Income Food & Beverage Cost F&B Cost as a % of F&B Income F&B Revenue per Employee F&B Sales as a % of Room Income No. of Employees No. of Covers Management Staff Management Trainees Supervisory Staff Others Total Financial Ratios Current Ratio Current Ratio Solvency Ratios Debt Equity Ratio Return on Capital Breakeven level of Sales Turnover Ratios Food Inventory Turnover Average Collection Period No. of days

Apd. Nos. Apd. Nos. Apd. Nos. ` ` % %

` ` % `

Nos. Nos. Nos. Nos. Nos.

Budget

Last Year

Accounting Reports and Formats

311

Table 11.4 ___________ Hotel, ___________

Previous Month Forecast

Projections Current Month

Actual

Next Month

Later Month

Opening Balance Cash Bank Total Receipts Cash Sales Restaurant Previous Months Bills Dividend Interest Foreign Exchange Conversion Others Total Disbursements Foreign Exchange Conversion Luxury Tax, Sales Tax Cash Paid out Employee Cost Service Charges Food Costs Maintenance and Renewal Power, Water and Telephone Rent, Rates and Taxes Other Operating Expenses Sub-total – Operating Expenses Corporate Tax Payments Loan Repayments Capital Expenditure Dividend Others Total

Contd.

312

Financial Accounting for Hotels Closing Balance Cash Bank Total Based on Rooms Income Food and Beverage Income Other Operating Income Total Income Luxury Tax/Sales Tax Service Charges Collected Foreign Exchange Conversion Collectable Amount

year and compares it to the budget (Table 11.5). Table 11.5 ___________ Hotel, ___________

Last Year

Budget

`

`

Current Year Sources of Funds Operations Add Depreciation Net Cash Generation from Operations Term Loans Increase in Liabilities (Specify the details) Decrease in Assets (Specify the details) Total Utilization of Funds Taxation Dividend Fixed Assets Increase in other Assets (Specify the details) Reduction in Liabilities (Specify the details) Repayment of Term Loan Total

`

Accounting Reports and Formats

313

This report indicates what is owed to the business and when the amounts are due. The statement analyses the amounts due to the company according to type of customers, individually listing major dues, and by their age (Table 11.6). Table 11.6 ___________ Hotel, ___________

Total Amount Due

Current Month

One Month Old

Two Months Old

Three to Six Months

Beyond Six Months

Remarks

Current Month ` Last Month ` Target/Budget ` Current Month in % Last Month in % Target in %

100 100 100

Analysis by type of customers with listings of major outstanding Travel Agents ____________ ____________ Others Total Travel Agents Companies ____________ ____________ Others Total Companies Government/Public Sector Undertakings ____________ ____________ Total Government

Contd.

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Financial Accounting for Hotels

Individuals ____________ ____________ Others Total Individuals Tour Operators ____________ ____________ Others Total Tour Operators Total

Outstanding expressed in terms of number of days credit sales during previous 3 months Current Month Last Month Target

This report indicates all pending capital expenditure requests that are duly approved. The statement indicates the amount sanctioned, already incurred, balance that will be incurred and if there would be any overruns as regards cost as well as time factor (Table 11.7). Table 11.7 ___________ Hotel, ___________

Capital Expenditure Request No. & Date

Particulars (with original date for completion)

Total

Revised Date for Completion

Sanctioned Amount

Already Incurred

Balance Amount

Total Amount

+/–

Date

`L

`L

`L

`L

`L

315

Accounting Reports and Formats

are shown separately. The statement covers results for the month as well as cumulative period (Table 11.8). Table 11.8 ___________ Hotel, ___________

Net Revenue

Cost of Sales

Payroll Related Costs

Other Operating Costs

Gross Income

`

`

`

`

`

%

Operating Departments Rooms Food and Beverages Telephone and Telex Laundry Banquet Health Club Others Sub-total Undistributed cost Employees Costs Other Operating Costs Administrative Expenses Marketing Expenses Interest Depreciation Other Income Sub-total Undistributed cost

Contd.

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Financial Accounting for Hotels

Departmental Results for the Cumulative Period ___________ (months) Operating Department Rooms Food and Beverages Telephone and Telex Laundry Banquet Health Club Others Sub-total Undistributed cost Employees Costs Other Operating Costs Administrative Expenses Marketing Expenses Interest Depreciation Other Income

This report indicates expenses conveniently grouped under operations, administration and marketing. They are compared with the budget as well as for the previous year (Table 11.9).

This report shows whether the income is at least at the budgeted level. Similarly, expenses are

This report gives details of revenue from various sales outlets and expenses which can be directly budget and the previous year (Table 11.11).

This statement provides information regarding number of covers, sales value, average spend per cover, normal food cost percentage based on the company pricing policy, food cost in `, actual

317

Accounting Reports and Formats

Table 11.9 ___________ Hotel, ___________

Cumulative

Month

Last Year

Budget

This Year

`

`

` Employees and Operating Expenses Employees Salary and Wages Staff welfare Sub-total Maintenance Renewal Energy Rent, Rates and Taxes Water Hire Charges Other Operating Expenses Total Administration Expenses Travelling and Conveyance Communication Printing Books and Periodicals Professional Charges Insurance Others Total Marketing Expenses Advertising Other Sales Promotion Entertainment Market Research Bad Debts Others Discounts and Commission Total

This Year

Budget

Last Year

`

`

`

318

Financial Accounting for Hotels

Table 11.10 ___________ Hotel, ___________

Cumulative

The Month

Last year

Budget

This year

`

`

`

Income Walk-ins Transient – Regular Transient – Group Permanent Extra Room Revenue Total Revenue Less: Allowance Net Income from Rooms Add: Shops Banquets Total Income: Expenses Salaries Other Employee Costs Total payroll Related Cost China, Glassware & Linen Commission Cleaning Laundry Newspaper Operating Supplies Other Operating Expenses Reservation Expenses Uniforms Advertisement Other Expenses Total Expenses Gross Income

This year

Budget

Last year

`

`

`

319

Accounting Reports and Formats

Table 11.11 ___________ Hotel, ___________

Cumulative

The Month

Last year

Budget

This year

`

`

`

Income Food: Restaurant Coffee Shop Room Service Banquet Sub-total Beverages: Indian Spirits Foreign Spirits Beer Mineral Waters Sub-total Other income Less: Allowances Net Food and Beverage income Expenses Cost of Consumption – Food Beverages Less Staff Food Cost Less Complimentaries cost Net Food and Beverage Cost Salaries China, Glassware, Linen, etc. Cleaning Kitchen Fuel Laundry Music and Entertainment Operating Supplies Other Operating Expenses Uniforms Other Expenses Sub-total Total Expenses Net Food and Beverage Cost as a percentage of Sales

This year

Budget

Last year

`

`

`

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Financial Accounting for Hotels

Table 11.12 ___________ Hotel, ___________

Sales No. of Covers

Sales Value

Sales Value per Cover

% of Sales Value

Amount Based on Budgeted %

Actual Cost as per Books

+/–

No.

`

`

%

`

`

`

Foreign Spirits Indian Spirits Mineral Water Sub-total Mutton Items Chicken Items Beef Items Vegetable Items Others Total Cost of Sales Staff Food Cost Complimentaries Total Food Cost Total Food Cost

For the Cumulative Period Foreign Spirits Indian Spirits Mineral Water Sub-total Mutton Items Chicken Items Beef Items Vegetable Items Others Total Cost of Sales Staff Food Cost Complimentaries Total Food Cost Total Food Cost

Cost

Accounting Reports and Formats

321

This report contains the previous day’s sales income from various revenue centres. By comparing performance can be assessed and corrective action can be taken wherever necessary (Table 11.13). Table 11.13 ___________ Hotel, ___________

Month to date Today This month Income: Rooms Food—Restaurant Coffee Shop Banquet Beverages – Indian Spirits Foreign Spirits Beer Mineral Water

`

`

Last year Budget Pro rata Pro rata `

Sub-total—Food and Beverages Minor Department: Telephone and Telex Laundry Others Sub-total—Minor Departments Total Income from Operating Departments Non-operating Income And Sales Tax Luxury Tax Paid out vouchers Others Total Collectable Amount

(A)

Collections – Cash Sales Against Settlement of Previous bills Sub–total (B) Disbursement: Cash Bank Sub-total

(C)

Contd.

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Financial Accounting for Hotels

Accounts Receivable Yesterday (D) Accounts Receivable Today (D + A – B) Cash and Bank Balance Yesterday (E) Cash and Bank Position Today (E + B – C) Foreign Exchange Earned Number of Rooms Occupied/Occupancy % Average Room Rate F&B Sale on account of Hotel Residents F&B Sales: Rooms Income %

This report provides information relating to the number of customers served and quantum of sales

Table 11.14 ___________ Hotel ___________

Cumulative for days

For the day Particulars

Last Year No.

`

Budget No.

`

This Year No.

`

This Year Food: Restaurant Breakfast Lunch Coffee break Dinner Coffee Shop Breakfast Lunch Coffee break Dinner Room Service

No.

`

Budget No.

`

Last Year No.

`

Breakfast Lunch Coffee break Dinner Banquet Breakfast

Contd.

Accounting Reports and Formats

323

Lunch Coffee break Total Food Beverages: Indian Liquor Afternoon Night Total Foreign Liquor Afternoon Night Total Mineral Water Beer Total Beverages Last year P

Sanctioned

T

P

T

Present

Total F&B

Present

P

Kitchen Restaurant Others

P

T

Sanctioned

T

P

T

Last Year P

T

Total Overtime

budget estimates of food and beverage cost. The variations between the actual and budgeted costs are analysed in this statement. (Table 11.15).

___________ Hotel, ___________

Covers Value No.

`

SV per % of Amt. cover SV `

%

`

Particulars Foreign Liquor Indian Liquor Mineral Water

Covers Value No.

`

SV per % of Amt. cover SV `

%

`

Sub-total

Contd.

324

Financial Accounting for Hotels Mutton Items Chicken Items Beef Items Vegetable Items Desserts Purchases Items Appetisers Others Total Cost: This year Budget Last year Net Cost of Sales This year Budget Last year Complimentaries This Year Budget Last year Staff Food Cost This Year Budget Last Year

1. Fill in the blanks: (a) ___________ report indicates what is owed to the business and when the amounts are due. (b) ___________ report indicates whether the income is at least at the budgeted level. (c) ___________ report indicates details of revenue from various sales outlets and expenses (d) ___________ statement provides information regarding number of covers, sales value, average spend per cover, normal food cost percentage based on the company pricing policy, food cost in ` (e) ___________ report indicates the previous day’s sales income from various revenue centres.

1. Give the format of the following: (b) Balance Sheet

Accounting Reports and Formats

(c) (d) (e) (f) (g) (h) (i) (j) (k) (l)

Fund Flow Statement Receivables Report Capital Expenditure Statement Expenses Statement Monthly Operating Statement for Rooms Food and Beverage Operating Statement for the month Food and Beverage Cost Report Daily Income Report Daily Food and Beverage Income Statement Daily Food and Beverage Cost Statement

325

326

Financial Accounting for Hotels

12

Chapter

Internal Check, Internal Control, Internal Audit and Mechanized Accounting

Learning Objectives

This chapter would help the reader to understand: Meaning and objects of internal check Meaning and characteristics of internal control The meaning, advantages of auditing Meaning of mechanized accounting The reasons for development and installation of mechanized accounting and factors to be considered for introducing mechanized accounting INTERNAL CHECK

Internal check is a continuous check on the day-to-day transactions carried out within the entity by arranging staff function in such a manner that a person’s duties are automatically checked by the other person in the ordinary course of audit. The objects of internal check are as follows: 1. To prevent occurrence of fraud and error 3. To have continuous check throughout the period/all through the year. INTERNAL CONTROL

Internal control is the plan of an organization and all the methods and procedures adopted by the management of an entity to assist in achieving management objectives of ensuring, as far as

Internal Check, Internal Control, Internal Audit and Mechanized Accounting

327

policies, safeguarding assets, prevention and detection of fraud and error, accuracy and The characteristics of internal control are as follows:

Internal Control in Hotels

Internal control in hotels is an essential part of accounting. For internal control, it is necessary that no part of accounting is under an absolute and independent control of any one person, but the work requires careful planning and coordination of the work of each person involved in maintaining the accounting records. 1. It ensures that all charges and allowances accounted to the guest’s accounts as well as in the hotel’s record. It ensures that all revenue is accounted for, that all stocks in hand are correct 2. Its aim is to prevent fraudulent and negligent practices by hotel employees. 3. It should aim to eliminate waste. The following are some of the areas in the case of a hotel where the internal control or internal check should be initialed: 1. Pilfering is one of the greatest problems in any hotel and the importance of internal control in this regard cannot be over emphasized. It is the responsibility of management to introduce controls which will minimize leakages as far as possible. Evidence of their success is provided by preparation of regular, perhaps weekly, trading accounts for each sales point anticipated being investigated. The auditor should obtain these regular trading accounts for the period under review, examine them and obtain explanations for any apparent deviations. 2. Room Sales: The charge for room sales is normally posted to guest bills by the receptionist or, in the case of large hotels, by the night auditor. The source of these entries is invariably the guest register and audit tests should be carried out to ensure that the correct number of

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Financial Accounting for Hotels

the guests’ bills and the standard room rate should be investigated to ensure that they have been properly authorized. 3. Stocks: The stocks in any hotel are both readily portable and saleable, particularly food and beverage stocks. It is, therefore, extremely important that all movements and transfers of such stocks are properly documented to enable control to be exercised over each individual stores area and sales point. The auditor should carry out tests to ensure that all such documentation is accurately processed. In order to satisfy himself of the valuation of stock, the auditor should consider attending at the physical stock taking and carrying out certain pricing and calculation tests. 4. Fixed Assets: on the stock basis. This can lead to confusion between each stock items and similar assets

5. Casual Labour: The hotel trade operates, to a great extent, on casual labour. The records maintained of such wage payment are frequently inadequate. The auditor should ensure that defalcation on their account does not take place by suggesting proper controls to the management. 6. Other points: (a) The auditor should check that money is recovered form the travel agents or booking agencies as per the terms of credit allowed when bills are made on travel agents or booking agencies. reference to the agreement on that behalf. (c) The auditor should ensure that proper records are maintained for booking of halls and other premises for special parties and recovered on the basis of tariff.

(e)

(f) (g) (h)

Tickets or basic record. This would enable the auditor to ensure that controls regarding revenue cycle are in order. The auditor should see that the costs of renovation and redecoration are treated as deferred revenue expenditure, whereas costs of major alterations and additions to the hotel building and facilities are capitalized. The auditor should ensure that proper valuation of occupancy-in-progress in the balance sheet is made and included in the accounts. The auditor should satisfy himself that all taxes collected from occupants on food and occupation are paid over to the proper authorities. In large hotels, it is usual to operate a booth to facilitate conversion of foreign currencies to Indian rupees. The auditor should ensure compliance with the various applicable

Sales Points: points in a hotel make both cash and credit sales. The auditor should reconcile the total

Internal Check, Internal Control, Internal Audit and Mechanized Accounting

329

sales reported with the total of the bills issued by the sales point. This total may take the form of a bill roll or a series of numerically controlled bills. This numerical control must be checked to ensure that all bills are included in the total. The cash element of the sales must then be checked to the cash records and credit sales in the total and detail to the guest’s bills. The best system to control sales of a hotel is the check-pad system. This system is based on checks, which are handed over by one department to another. The check pads are retained by the control department and are issued against the signature of the departmental heads. They are made of different colours to identify the individual department. The departmental heads are responsible to issue them to other employees of their departments after taking their signatures. These check pads are always kept in safe custody to avoid misuse.

transcript sheet or machine balances and other records. Control of Room Sale

the night auditor must satisfy himself in respect of the following: 1. Was the room occupied from the previous day? 2. If so, has the guest’s account been debited with the amount of room charges? 4. If yes, was the guest charged for the apartment at the time of arrival? 5. Was the guest charged for the apartment at the check-out time if he continued his stay after check-out time? 6. Is the rate of the room occupied by the guest correct? The room sale of a hotel is generally checked with the help of the following documents at different levels of the day:

(f) House-Keepers Report

First of all, the night auditor has to see that the guest registration number for the day begins in continuation of the last number of the previous day. This can be checked from the previous day’s arrival sheet and the current day’s arrival sheet, advance or current booking card and copy of the guest registration card. The house-keeper’s report is compared with the room check, arrival sheet, departure sheet, receptionist room sales report, guest’s bills, etc.

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Financial Accounting for Hotels

The departure sheet is also compared with the cashier’s clearance card to ascertain their agreement. The receptionist room sales report is compared with the house-keeper’s report in order to know room occupancy position. Control of Food Sale

The control of food sale is done with the help of the checks. Generally, the following documents and checks are helpful in controlling the sale of food:

does not affect the future records and statistics of sales. The control has to ensure that a bill is in the bill. The cash sale is further checked with restaurant summary and cash book summary. sale of food shown by restaurant summary is also compared with transcript sheet or machine balance. summary, restaurant summary, transcript sheet, visitor’s tabular ledger or machine balance card, etc. to the income auditor. The income auditor, after thorough checking, prepares necessary report to the accounts departments for posting into the respective ledgers. AUDITING

The word audit is derived from the Latin word audire which means ‘to hear’. It was an Italian, mentioned and described the duties and responsibilities of an auditor. The original object of an audit was principally to see whether the accounting party had properly accounted for the receipts and payments of cash. The principal object of modern audit is to see whether the balance sheet exhibits a true and fair view of the state of affairs of the company and whether it is drawn up incidental object of modern audit.

Internal Check, Internal Control, Internal Audit and Mechanized Accounting

331

of a business, as will enable the auditor to satisfy himself that the balance sheet is properly drawn

the best of his information and the explanations given to him and as shown by the books; and if

of the books and records of a business or other organization in order to ascertain or verify and to

Advantages of Auditing

2. It keeps the accounts clerk regular and vigilant as they know that the auditors could complain against them if the accounts are not prepared up to date or if there is any irregularity. accounts of previous years.

the valuation of assets and goodwill as the accounts have already been subject to audit by an independent person.

although it is not the duty of the auditor to give advice. 8. If the accounts have been prepared on a uniform basis, accounts of one year can be compared with other years and if there is any discrepancy, the cause may be enquired into. 10. It would facilitate the settlement of the accounts of a deceased partner. Audit Programme in Hotels

There is no shortcut to verify the accounting programmes without auditing activities. The following are some of the audit programmes adopted by hotels: 2. Enquire into the internal check system regarding the following:

(c) Receipt of cash on account of daily sales, room rent, meals, wines, billiards, etc. 3. Verify the stocks. 5. Visitor’s ledger should be carefully examined to see whether all the charges against them are entered in their accounts.

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Financial Accounting for Hotels

articles are revalued. In some hotels, expenditure on these items is capitalized and renewal account is capitalized with an amount based on previous experience by debiting the revenue account. INTERNAL AUDITING

Internal auditing is a profession and activity involved in helping organizations achieve their stated objectives. It does this by utilizing a systematic methodology for analysing business processes, procedures and activities with the goal of highlighting organizational problems and recommending internal auditing activity. The scope of internal auditing within an organization is broad and may involve topics such as safeguarding assets, and compliance with laws and regulations. Internal auditing frequently involves measuring compliance with the entity’s policies and procedures. However, internal auditors are not responsible for the execution of company activities;

auditors may have a variety of higher educational and professional backgrounds.

ing appraisal of the nancial health of a company’s operations by its own employees. function are called internal auditors internal audit, internal auditors will evaluate and monitor a company’s risk management, reporting, and control practices and make suggestions for improvement. Internal auditing covers not only an organization’s nance function, but all the operations and systems rm. While internal auditors are typically accountants, this activity can also be carried out by other professionals who are well-versed with a company’s functions and the relevant regulatory requirements. Nature of the Internal Audit Activity

steps: 1. Establish and communicate the scope and objectives for the audit to appropriate management. measurements, and key transaction types. This involves review of documents and interviews. Flowcharts and narratives may be created if necessary.

Internal Check, Internal Control, Internal Audit and Mechanized Accounting

333

3. Identify control procedures used to ensure that each key transaction type is properly controlled and monitored. most important controls are operating as intended. problems. a follow-up database for this purpose. Internal Auditing Process

1. Examination of the system of internal check, for both soundness in principle and effectiveness in operation 2. Examination and checking of accounting records and statements

be judged necessary. Field of Relationship Between Statutory and Internal Auditor

common interest in ascertaining that there is: operating satisfactorily.

Difference between Internal Audit and Statutory Audit

Following are the main points of differences between internal audit and statutory audit: 1. Appointment: The management of the organization makes the appointment of an internal auditor. The statutory auditor is appointed by different authorities. First statutory auditors are appointed by the shareholders in the annual general meeting of a company. 2.

3. Objects: showing the true and fair view of the affairs of the organization or not. The main object of the internal audit is to detect and prevent errors and frauds. 4. Scope: be changed by mutual consent between the auditor and the management of the audited and the management of the unit under audit.

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Financial Accounting for Hotels

5. Remuneration:

6. Report: The statutory auditor submits his report to the shareholders of the company in its general meeting. The internal auditor submits his report to the management of the company who is also his appointing authority. Removal: company in the general meeting can remove the auditor. It also has to take the permission of the central government. The management of the entity can remove internal auditor. following reasons: (a) Without co-operation between the statutory auditor and the internal auditor, there could be unnecessary duplication of work. (b) The statutory auditor may be of great assistance to the internal auditor as an advisor, and the internal auditor would be a great help to the staturory auditor because of close knowledge of the accounting system and technical knowledge of the business, assets, depreciation charges, the ascertainment of liabilities and the risks of fraud or misappropriation. Internal Audit—Hotels

The auditor should enquire carefully into the system of accounts in use as unless the system is good, the opportunities for leakage and manipulation are considerable. The Visitor’s Ledger

with reference to the number of days the rooms were occupied and the extent of vacancies should be looked into. the operation of these accounts. The question of the treatment of depreciation of bedding, linen, plate, cutlery, china, etc. is

amount according to the experience of previous years, and debiting the actual expenditure on renewals, the balance being carried forward. furniture is on the hire-purchase system, the auditor should ascertain revenue is duly charged with the interest or hire portion of the installments paid.

Internal Check, Internal Control, Internal Audit and Mechanized Accounting

335

MECHANIZED ACCOUNTING

developed countries. In India, some of the big business units adopted mechanzied accounting. Reasons for the Development of Mechanised Accounting

The reasons for the development of mechanized accounting are as follows: 2. The complexity of the data to be collected and processed 4. The need of analysis of the accounting information for managerial decision making 5. The need of the accounting information for various stakeholders at appropriate time. Reasons for Installation

The following reasons can be stated for the installation of the accounting machines in organizations: 1. Economy: In contrast to the manual system of accounting, the mechanized system helps to analyse and tabulate the accounting information at a lower cost. 2. Speed: information. 3. Information: various statements necessary for the managerial decision making. 4. Accuracy: accuracy of the basic data. 5. Job satisfaction among staff: provides greater satisfaction to the accounting staff by reducing drudgery. 6. Prestige: It adds a great deal of prestige as the accounting staff can prepare and provide the statements more accurately and neatly for the stakeholders. How Accounting Machines Work

1. Copying: From the original vouchers (documentary evidences), the information such as date, reference number, particulars, quantity, rates, amount, etc. are copied to Journal and Ledger. 2. Analysis and Consolidation: accounting machines using the mathematical applications (addition, subtraction, etc.) derive meaning the information for analysis and consolidation. 3. Proving accuracy of work: Here the accounting machines bring out accuracy of the

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Financial Accounting for Hotels

4. Summarizing Information: trial balance, accounting machines summarize the accounting information in the form of

Factors to be Considered for Introducing Mechanized Accounting Objectives

1.

Factors to measure

Information To aid management

Its value to the cost of production

For credit control For stock control

How often will it be used?

For production control

For better presentation, etc. 2.

Timeliness For prompt collection

Value compared to cost

For discount taking

Will executives (or personnel) be available to deal with earlier records?

To avoid overstocking

Will bottlenecks or peaks be increased or decreased?

To avoid lost orders To utilize funds to full 3.

Protection

employee and customers, or does it invite temptation? Is complete accuracy ensured?

Through increased accuracy Contd.

Internal Check, Internal Control, Internal Audit and Mechanized Accounting

4.

337

Service Will the proposed system provide better, equal or worse service to our customers? If worse, are there compensatory factors? In account presentation In handling queries In faster service (applies particularly to remittance or installment handling at counters)

5.

Convenience In handling queries

Will the proposed system be better, equal or worse, than the present system for:

Reference Legibility and presentation Elimination of bottlenecks, overtime and casual staff Ease and simplicity of operation 6.

Economy From indirect savings from above and

direct savings unless they can be gainfully used.

In personnel need to be credited to mechanization when it will eliminate addition In man-hours

to staff which would otherwise be inevitable

In machines In space In stationery Source:

Accounting Fundamentals

Some Accounting Machines

1. Ledger Posting Machines: These are combination of typewriter and comptometer which at the end. In the end, we can print copies of the statement using carbon paper. These

338

Financial Accounting for Hotels

machines are used in writing cash book, sales ledger, bought ledger, principal ledger, etc. These machines are outdated now. 2. Punch Card machines: These machines work by passing electric current through holes on cards on the basis of the basic data fed into the machine. The machine prepares statements in a tabulated form, with totals and balances. These machines are also outdated now. 3. Computers: The computer is also called the Electronic Processing System (EDP System). This helps in manipulating symbols and process information by receiving,

over computational and clerical work whenever it is considered beyond manual capabilities through complicated circuits, which have been constructed in such a way as to enable the computer to add, subtract, multiply, divide, and move data from one position to another and must, therefore, be converted to a form readable by the machine. The processing within the computer and the operation of subsidiary equipment, i.e., input and output devices are controlled by means of the programme, i.e., a detailed list of instructions to be followed in performing each step in the processing. IDS – Bangalore The hospitality industry, worldwide, is entering an exciting phase of development, as industry in this expansion, with a comprehensive range of integrated software solutions – the

needs of the hospitality sector from the inside, pooling the talents of hospitality professionals

hospitality enterprises including clubs, serviced apartments, etc. We believe in working closely with our clients to recognize their unique requirements and

services-such as reservations, point of sale, accounts and more. Contd.

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200 top executives provide enlightened leadership, integrating a large workforce of software and technical support teams, situated around the world.

and more. assistance, operational help, trouble shooting and product updates. In the past 20 years, we’ve hospitality clients! In our 20th anniversary year, we celebrate our client partnerships, happy in the knowledge that with our in-depth domain expertise and innovative solutions, we’ve helped generate a turnover of millions of smiles.

Objective Type Questions 1. Fill in the blanks: (a) _______ is a continuous check on the day-to-day transactions carried out within the entity by arranging staff function in such a manner a person’s duties are automatically checked by the other person in the ordinary course of audit. (b) _______ is the plan of an organization and all the methods and procedures adopted by the management of an entity to achieve the objective of ensuring, as far as practicable, policies, safeguarding assets, prevention and detection of fraud and error, the accuracy information. of the books and records of a business or other organization in order to ascertain or

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Financial Accounting for Hotels

Review Questions 1. What do you mean by internal check? 2. What are objects of internal check? 3. What do you mean by internal control? 5. What do you mean by internal audit?

8. What do you understand by internal control? What are the advantages of internal control? 10. What do you understand by internal audit? How is it different from statutory audit?

Index

Index A Account 13 Account Transfer/Correction 295 Accounting 3 Advantages 4 Attributes 4 Limitations 4 Objectives 3 Accounting Concepts 5 Accounting Period Concept 6 Accrual Concept 7 Business Entity Concept 5 Cost Objectivity Concept 7 Dual Aspect Concept 6 Going Concern Concept 5 Historical Record Concept 7 Matching Concept 7 Money Measurement Concept 5 Realization Concept 7 Accounting Conventions 7 Conservatism 8 Consistency 7 Full Disclosure 8 Materiality 8 Accounting Equation 6 Accrued Income 169 Adjustments Entries 169 Advance/Deposit 290 Allowance or Discount Voucher 294 Amortization 165 Assets 12

Auditing 330 Advantages of Auditing 331 Average Daily Rate 301 Average Rate per Guest 301

B Bad Debts 165 Bank Reconciliation Statement 119 Statement 119 Balance Sheet 166, 308 Balance Sheet under USHA 259 Bookkeeping 2 Business Transaction 12

C Capital 12 Capital Expenditure 166 Capital Expenditure Statement 314 Cash Bill 21 Cash Book 84 Cash Flow Projections 309 Cash Settlements 293 Cash Summary 298 Cash Transactions 12 Cheque 28 City Ledger 297-298 Nominal Account 14 Personal Account 13 Real Account 13

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Index

Foreigners to Domestic Visitors’ Ratio 301 Compensating Errors 142 Errors of Commission 141 Errors of Omission 141 Errors of Principle 141 One-sided Error 142 Rectifying Entry 142 Two-sided Error 142 Contingent Liability 168 Contra Entries 86 Control of Food Sale 330 Control of Room Sale 329 Credit Note 26 Credit Settlements 293 Credit Transactions 12 Creditor 12 Current Assets 12, 168 Current Liabilities 12

D Daily Food and Beverage Income Statement 322 Daily Food and Beverages Cost Statement 323 Daily Income Report 321 Debit Note 25 Debtor 12 Deferred Revenue Expenditure 167 Departmental Accounts in Hotel 227 Departmental Results 315 Depreciation 165 Direct Expenses 163 Discount 12 Drawing 12

Fund Flow Statement 312

G Generally Accepted Accounting Principles (GAAPs) 8 Guest Billing 290 Guest Ledger 295

H Horizontal Split 291

I IDS 338-339 Income 12 Income Statement under USHA 229 Incomes and their Basis of Allocation 228 Indirect Expenses and Losses 165 Internal Auditing 332 Internal Check 326 Internal Control 326

J Journal 29 Advantages of Journal 30 Compound Journal Entries 32 Importance of Journal 30 Limitations 30 Opening Entry 33

E Expense 12 Expenses and their Basis of Allocation 227-228

F Final Accounts 162 Financial Expenses 165 Fixed Assets 12, 168 Food and Beverage Cost Report 320 Food and Beverage Operating Statement 319

K Kinds of Cash Book Double-Column Cash Book 85 Single-Column Cash Book 84 Three-Column Cash Book 85

L Ledger 55 Balancing an Account 58

Index

Liabilities 12 Long-term Liabilities 12 Loss 12

M Mechanized Accounting 335 Computers 338 Ledger Posting Machines 337 Punch Card Machines 338 Multiple Occupancy Ratio 301

N Net Purchase 163 Net Sales 163 Night Auditing 302

O Occupancy Percentage 301 Operating Ratios 301 Outstanding Expenses 168

P Passbook 120 Pay-in Slip 27 Petty Cash Book 87 Imprest System 87 Prepaid Expenses 168

S Sales Day Book 79 Sales Returns Book 82 Schedules Under USHA Administrative and General Expenses 253 Casino 243 Food and Beverage 242 Garage and Parking Lot 245 Golf Course 246 Golf Pro-Shop 247 Guest Entertainment 256 Guest Laundry 248 Marketing 254-255 Other Operated Departments 252 Property Operation, Maintenance and Energy Cost 257 Rent, Property Taxes and etc. 258 Rentals and other Income 251 Rooms 241 Swimming Pool 249 Telephone 244 Tennis 250 Selling and Distribution Expenses 165 Subsidiary Books 75 Advantages of Subsidiary Books 76 Systems of Bookkeeping Cash System 2 Double-entry Bookkeeping 2, 14 Single-entry System 2

T Provision or Reserve for Doubtful Debts 165 Purchase Book 77 Cash Discount 77 Trade Discount 77 Purchases Returns Book 80

R Receipt 24 Receivable Report 313 Revenue 12 Revenue Expenditure 167 Room Operating Statement 318 Rules of Debit and Credit 14

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Trading Account 162 Trial Balance 138 Objectives of Preparing Trial Balance 139

U Unearned Income 169 Uniform System of Hotel Accounting (USHA) 228-229 Advantages of USHA 229

V Vertical Split 291 Visitor’s Tabular Ledger (VTL) 295 Voucher 24 VPO (Visitors Paid Out) 294