FRONT OFFICE ACCOUNTING

A front office accounting system monitors and charts the transactions of guests and
businesses, agencies, and other non-guests using the hotel’s services and facilities.

I- Accounting Fundamentals:
The front office accounting system is responsible for:
 Creating and maintaining an accurate accounting record for each guest or non-
guest.
 Tracking all financial transactions throughout the guest cycle.
 Ensuring internal control over cash and non-cash transactions.
 Recording settlement for all goods & services provided.
The front office accounting system shall be customized and tailored to track each hotel’s
needs. Therefore, no two hotels have exactly the same front office accounting systems.

1. Accounts:
An account is a form on which financial data are accumulated and summarized. It can be
imagined as a container that stores the results of various business transactions. Front
office accounts are recordkeeping devices to store information about guest and non-guest
financial transactions. Recall back in university days that an account can be visualized as
a T-Account:

The growing use of automated systems has diminished the popularity of T-Accounts. For
a front office account, charges are increases in the account balance and are entered on the
left side of the T-Account while payments are decreases in the account balance and are
entered on ten right side of the T-Account. Eventually, T-Account balance shall be
calculated by taking the difference between charges and payments. In a fully automated
system, charges (debits dr) and payments (credits cr) may be listed in a single column
with the amounts of payments placed within parentheses or with a minus signs to indicate
their effect (a decrease) on the account balance.

2. Guest Accounts:
A guest account is the record of financial transactions that occur between a guest and the
hotel. Guest accounts are created when guests guarantee their reservations or when they
register at the front desk.

3. Non-Guest Accounts:
If the hotel extends in-house charge privileges to local businesses or agencies as well as
groups sponsoring meetings at the hotel in an effort to promote sales. In light of this,
front office staff will create non-guest account to track postponed transactions. No-guest
accounts opened for local businesses and agencies are referred to as house accounts or
city accounts while non-guest accounts created for groups are called master accounts.
Lastly, a non-guest account can be created when a guest fails to settle his / her account at
1
departure. Under this very situation, responsibility of account settlement shifts from front
office to accounting department / division.

4. Folios:
A folio is a statement of all transactions (i.e. debits & credits) affecting the balance of a
single account. When an account is created, it is assigned a folio with a starting balance
of 0. All transactions that increase (debit) or decrease (credit) the balance of an account
shall be recorded on the folio. At Checkout, any guest folio should be balanced to 0
through full cash payment, payment card transfer, personal check transfer, special
program transfer, or direct billing transfer.
In order to maintain folios, posting is conducted. This is the process of recording
transactions on a folio (i.e. proper folio, proper location and proper amount).
Under the manual, semi-automated and fully automated systems, folios are called hand-
written folios, machine-posted folios, and computer-based electronic folios respectively.
Moreover, all folios shall have a unique serial number for internal control and storing
purposes.
In the front office department, there are four common types of folios used:
 Guest folios: accounts assigned to individual persons or guestrooms.
 Master folios: accounts assigned to more than one person or guest room; usually
reserved for group accounts.
 Non-guest (or semi-permanent) folios: accounts assigned to non-guest businesses
or agencies with charge privileges at the hotel.
 Employee folios: accounts assigned to employees with charge privileges.

If the room and tax portion are to be separated from other charges, the room and tax is
posted to the room folio (A folio). Similarly, food, beverage, Internet and other charges
are posted to the second incidental folio (B folio). Moreover, if a business guests requests
his / her charges / payments be split into two personal folios: one to record expenses to be
paid by the sponsor firm and one to record personal expenses, then 2 folios will be
created for one guest.

5. Vouchers:
A voucher depicts the details of the transaction information gathered at the source of
transaction and is, hence, a supporting document used only for internal control purposes.
Below are some of the commonly used vouchers in the hospitality industry:
 Cash vouchers.
 Charge vouchers.
 Transfer vouchers.
 Paid-out vouchers.
 Correction vouchers.
 Allowance vouchers.
In fully automated systems, as revenue-outlet terminals are interfaced with front office
systems, transmission of transaction information (i.e. vouchers) is done automatically to
electronic folios. As a result, the use of paper vouchers has been significantly reduced.

6. Points of Sale [i.e. POS]:

A point of sale is the physical location at which goods or services are purchased;
sometimes called a revenue center. Moreover, some hotels offer guest-operated devices
2
that function as self-service points of sale such as in-room movie systems, Internet-access
devices and in-room vending systems.
Since charges are usually incurred at remote points of sale, and guest and non-guest folios
are maintained at the front office department, posting of different guest and non-guest
charges shall be performed. An automated point-of-sale system enables this under the
fully automated system. Automated POS systems significantly reduce the amount of time
required to post charge purchases to guest folios, minimize the number of times
transactional data must be handled, and virtually eliminate after departure (late) charges.
Therefore, automation helps front office staff create a well-documented, legible folio
statement with a minimum number of errors.
When posting charges, the following items shall be considered:
 Source document or transaction number.
 Amount of the charge.
 Name of the point-of-sales outlet.
 Guestroom number.
 Name of the guest.
 Brief description of the charge.
 Guest signature & employee identification (if charge is supported by a source
document).

7. Ledgers:
A ledger is a summary grouping of accounts. The front office ledger is the collection of
front office account folios, which usually include guest ledgers (i.e. summary of charges
and payments of all guests staying at the hotel). Those very ledgers are part of the
account receivable. In fact, the latter includes, in addition to guest ledger, non-guest
ledger or city ledger (summary of charges and payments of all non-guests).
If, at departure, a guest account is not settled in full by acceptable payment, the guest’s
folio balance is transferred from the guest ledger to the city ledger in the back office
accounting division for collection.

II- Creation and Maintenance of Accounts:

Front office department is responsible for accurate and complete recording of all
transactions affecting guest ledger accounts. Even though front office staff may also be
responsible for recording non-guest account transactions, as explained above, the
accounting division is responsible for eventual collection of non-guest ledger accounts.
Guest folios shall be created during the pre-arrival or arrival stage of the guest cycle.
Moreover, in automated systems, guest information is automatically transferred from an
electronic reservation record or captured at registration and entered onto an electronic
folio. At check-in, reservation data are verified and combined with room rate information
and the guest’s assigned room number to finalize an in-house electronic folio.

1. Automated Recordkeeping Systems:

All point-of-sale transactions are automatically posted to an electronic folio. In a printed
copy of a folio, debits (charges) and credits (payments) may appear in a single column
with payments distinguished by parentheses or a minus sign. Printed folio copies may
also be produced in the traditional multiple-column account format. Moreover, it is
unnecessary to manually maintain an account’s previous balance in a fully automated
system, as such systems maintain current balances for all folios.

3
2. Charge Privileges:
Potential guests who would like to have guest charge privileges shall present an
acceptable and valid payment card or direct billing authorization at registration. Failing to
do so, guests would have to pay, in full, all their charges through cash, hence called Paid-
in-Advance [PIA] guests and would possess no post status.
Local businesses or residents may apply to the hotel and qualify to establish a house
account or non-guest account. Charge purchases of house accounts, similarly to those of
guest accounts, are transferred from revenue centers to the front office accounting system
for posting.

3. Credit monitoring:
In order to monitor and control charge privileges, the front office clerk should check
whether the total net purchases (i.e. purchases less payments) are less than floor limit
(i.e.: payment card's line of credit). Guest and non-guest accounts with other approved
credit arrangements (bill to account) are subject to limitations established by the front
office. These restrictions are referred to as house limits (i.e. hotel's limit).
When accounts approach floor limit / house limit (i.e. when high-balance / high risk
accounts occur), front office management need to be notified. In automated systems, front
offices may generate a guest list on demand that highlights the names of guests whose
accounts are near or over their approved credit limits. In such cases, front office
management may ask the payment card company to authorize additional credit (i.e.
increase floor limit) or request the guest to make partial payment to reduce the
outstanding account balance. If this not possible, front offices automatically relay to all
point-of-sales outlets that guest in question becomes a PIA guest.

4. Account maintenance:
Whatsoever recordkeeping system under which hotels might operate, maintenance of
guest and non-guest accounts is ensured by the following formula:

Net outstanding balance = Previous balance + Debits - Credits

NOB = PB + DR - CR

To illustrate consider the following case:

Jamel has accumulated, just before checkout, the following details in his guest folio:
 Room Charges $ 500
 Food Charges $ 265
 Beverage Charges $ 189
 Telephone Charges $ 57

4
  Extra Charges $ 87.30
 Payment (During Stay) $ 92.50
 Guaranteed Reservation Payment $ 100
Even though outstanding balance = Previous Balance + Debits – Credits, as hotel is not
posting anything currently but verifying the balance (before check-out), the formula can
be rephrased as Debits - Credits = ($ 500 + $ 265 + $ 189 + $ 57 + $ 87.30) – ($ 92.50 +
$ 100) = $ 1,098.30 - $ 192.50 = $ 905.80. This figure refers to the amount that check-out
clerk would require as a payment in order to close properly Jamel’s guest account.

III- Tracking Transactions:

Under fully automated systems, tracking transactions is ensured through on-line
electronic transfer of transactional information from remote points-of-sale terminals to
the front office system. In accounting terminology, a transaction is an exchange of goods
and services for cash or a promise to pay. Under this very assumption, "nothing happens
until a transaction occurs" means that front office clerks shall first of all have a
transaction, its supporting documents (i.e. vouchers, invoices…) to be able later to debit
or credit certain accounts. In hotels, transactions might have the form of:
 Cash payment.
 Charge purchase (account receivable).
 Account correction.
 Account allowance.
 Account transfer.
 Cash advance.

1. Cash Payment:
Cash payment serves as to reduce the net outstanding balance, is posted as credit to the
guest or non-guest account. For that, cash vouchers shall be used as a transaction-
supporting document. Moreover, only cash payment transactions taking place at the front
desk will create entries that appear on a front office account folio.

2. Charge Purchase:
Charge purchases represent deferred payment transactions that increase the outstanding
balance of a folio account. In this transaction type, front office clerks shall use charge
vouchers as a transaction-supporting document.

3. Account Correction:
An account correction transaction resolves a posting error on a guest or non-guest folio
detected at the day the error is made (i.e. before the closing of the business day). In this
transaction, front office clerks shall use correction vouchers as a transaction-supporting
document. Moreover, the effect of an account correction on the outstanding balance of a
folio can be known only and only after understanding the nature of the posting error. This
implies that account correction can sometimes increase the balance, decrease the balance
or simply have no effect on the net outstanding balance. Lastly, usually the front desk
agent posting the correction signs the correction voucher, and presents it to the front
office manager or supervisor on duty for review and approval.

4. Account Allowance:
An account allowance occurs because of two reasons:

5
  As a compensation of poor service, or as rebates for coupon discounts. That way,
guest outstanding balance decreases.
 As to correct a posting error detected after the closing of the business day. That
way, the effect on the net outstanding balance is not known beforehand until after
understanding the nature of the posting error.
For both reasons, front office clerks shall prepare an allowance voucher as a transaction
supporting document.

5. Account Transfer:
Such a transaction involves two different guest or non-guest accounts, and tend to have
offsetting impacts on subsequent account balances. A transfer voucher supports the
reduction in balance on the originating folio and the increase in balance on the destination
folio.

6. Cash Advance:
Cash advance transaction reflects cash flow out of the hotel’s resources (referred to as
paid-out) and shall require a manager’s approval before cash is dispensed. This
transaction is considered as a debit transaction, since it increases guest folio’s outstanding
balance and is supported by cash advance vouchers or paid-out vouchers.

IV- Internal Control:

Internal Control within the front office system aims to:
 Track transaction documentation.
 Verify account entries and balances
 Identify vulnerabilities in the accounting system.
The keyword to internal control is auditing, which is the process of verifying front office
accounting records for accuracy and completeness.

1. Cash Banks:
Cash bank is the amount of cash assigned to a cashier so that he/she can handle the
various transactions that occur in a particular work shift. It is used for the following
purposes:
 Make change when guests settle their accounts.
 Process paid-outs.
 Provide other cash-related services during the cashier’s shift.
At the beginning of each shift, all cashiers must sign their cash banks and at the end of
the shift, shall deposit all cash, checks, and other negotiable instruments in the general
cashier's safe deposit box. Moreover, at the end of each shift, cashiers should watch out
for cash discrepancies (i.e. any difference between front office cash sheet and the actual
amounts in their cash drawers). Cash discrepancies might have the form of cash overages,
shortages, or due backs. Lastly, cashiers shall calculate with the net cash receipt, which
is:

Amount of all cash, checks, and other negotiable instruments in cashier’s drawer –
amount of the initial cash bank + all paid outs

6
2. Audit Controls:
Front office audit controls help ensure that front office staff members properly handle
cash, guest accounts, and non-guest accounts. Along with the fact that hotels might
employ internal control auditors, at least once in a year, hotels (especially for hotels
traded in the stock market) get use of external certified public accountants responsible for
approving hotel's accounts.

V- Settlement of Accounts:
One of the responsibilities of front office clerks is to settle guest accounts, which means
the eventual collection of payment for outstanding account balances (i.e.: bringing
account balances to 0). This is usually ensured either by full cash payment, transfer to an
approved credit card, personal check, special program, or direct billing account…
Although guest account settlement normally occurs at check-out, guests may make
payments against outstanding folio balances at any time prior to check-out. Moreover,
when a guest account is paid, the folio is updated to indicate account settlement and
closure. Lastly, of equal importance are late charges (i.e. charges that are posted in the
system after the account has been closed). We will talk about this problem more in the
next chapter.