Chapter 1: Hospitality Decision Makers’ use of

Accounting

Today’s lecture:
1. Key characteristics of the hospitality industry
2. Accounting implications of distinctive hospitality
industry characteristics
3. What is accounting?
4. Criticisms of financial measures
5. Uniform system of accounts
6. Organisational forms

© Chris Guilding 1
1. Key characteristics of the hospitality industry

The hospitality industry encompasses a breadth of organisations,

eg:
 Hotels
 Motels
 Restaurants
 Fast food outlets
 Pubs and bars
 Country and sport clubs
 Cruise liners.

© Chris Guilding 2
Key characteristics of the hospitality industry
(cont’d)

A focus on hotels is pertinent, because hotels offer a broad and

disparate range of service and production activities at a single
site. Typical activities include:

Can be compared to seat sales in

a. Accommodation
airline or entertainment industries.

Can be compared to production

b. Restaurant
activities in manufacturing industry.

c. Bar Can be compared to retailing.

© Chris Guilding 3
2. Accounting implications of distinctive
hospitality industry characteristics

Care must be taken when determining

a particular function’s scope of
accountability. Due to their influence
on sales and expenses, some
a. Disparity of
managers can be held profit
functions
accountable (e.g., a restaurant
manager). Due to no direct influence
on sales, others can only be held cost
accountable (e.g., a training
manager).

© Chris Guilding 4
 Accounting implications of distinctive hospitality
industry characteristics (cont’d)
Factors affecting departmental
performance can be complex in
b. Interdependency hotels. If room occupancy affects
of functions F&B sales, care must be taken if
attempting to hold an F&B manager
profit accountable.

Hotel activity can be highly volatile

over the course of an economic cycle,
c. High sales a year, a week, and a day. Accurate
volatility budgeting and forecasting systems are
therefore important to aid staffing,
room rate and restaurant price
© Chris Guilding discounting decisions. 5
 Accounting implications of distinctive hospitality
industry characteristics (cont’d)
The absolute perishability of rooms,
conference and banquet services and
d. Product the relative perishability of food
perishability underlines the importance of accurate
hotel demand forecasting as part of
the budgeting process.

High rent and depreciation expenses,

together with significant salary costs,
result in hotels having a high fixed
e. High fixed costs
cost structure. This carries
implications for breakeven analysis
and also capital budgeting.
© Chris Guilding 6
 Accounting implications of distinctive hospitality
industry characteristics (cont’d)

The high labour intensity apparent in

many hotel activities highlights the
e. Labour intensive importance of monitoring differences
activities between actual labour cost and
budgeted labour cost and also using
performance measures that focus on
labour productivity.

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3. What is accounting?

• Accounting concerns information systems that record business

activities in financial terms and consolidate the information
recorded to produce reports that convey a business’s financial
achievements to decision makers such as managers and
shareholders.

• Financial accounting concerns the preparation of financial

reports for external users such as shareholders, banks and
government authorities.

• Management accounting concerns the provision of financial

information to managers to help them in their decision making
and control of businesses.
© Chris Guilding 8
3. What is accounting? (cont’d)

For most organizations, the accounting system

represents the most extensive and all encompassing
information system. A front office manager might talk
of number of check-ins, a restaurant manager may talk
of covers served, a rooms manager may talk of %
occupancy. While each refers to different operational
units, they are all familiar with terms such as “cost” and
“profit”.

© Chris Guilding 9
4. Criticisms of accounting measures

• Financial measures focus on symptoms rather than causes.

Profit may decline because of declining customer service. It
might therefore be more helpful for management to focus on
monitoring factors such as customer service rather than profit.

• Financial measures tend to be oriented to the short-term

performance of the past. This can hinder forward-looking,
longer-term initiatives such as the development of a strong hotel
chain image amongst customers.

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5. Uniform system of accounts

A uniform system of accounts for the lodging industry (USALI)

has been developed in the USA.

The USALI provides the following benefits:

• It represents an “off the shelf” accounting system that
can be adopted by any hotel.

• The system can be viewed as “current best practice” as

it benefits from the experience of individuals who have
contributed to the system’s development.

• By promoting consistent account classification

schemes and performance reporting, it facilitates
comparison
© Chris Guilding between hotels, and within hotel groups. 11
5. Uniform system of accounts

Figure 1 provides an example of an income statement prepared in

USALI format. For many years this statement was referred to as a
‘Profit & Loss Statement’, however, consistent with international
accounting standards, we now see most English speaking countries
using the term ‘Income statement’. You will still hear many
managers referring to the ‘P&L account’, however.
The USALI is divided into three main sections:
• The first section concerns revenue and expenses that can be
traced to a hotel’s revenue generating functional areas.
• The “undistributed operating expenses” section identifies the
expenses of a hotel’s non-revenue generating functional areas.
• The final section identifies expenses that cannot be traced to
a hotel’s operational management.
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 FIGURE 1
KangarooLodge Hotel Summary Income Statement
5. Uniform system of accounts
For the year ended 30 June 20X1
Net Cost of Payroll & Other Income
Revenue Sales Related Expenses (loss)
Expenses
Operated departments
Rooms $1,232,000 $ 0 $ 193,000 $ 101,000 $ 938,000
Food 404,000 171,000 159,000 48,000 26,000
Beverage 221,000 54,000 58,000 27,000 82,000
Telecommunications 64,000 59,000 4,000 2,000 (1,000)
Total Operated Departments 1,921,000 284,000 414,000 178,000 1,045,000
Undistributed Operating Expenses
Administrative and General 51,000 28,000 79,000
Sales and Marketing 25,000 36,000 61,000
Property Operation & Maintenance 29,000 6,000 35,000
Utilities (energy, water, etc) 0 79,000 79,000
Total Undistributed Operating Expenses 105,000 149,000 254,000
Gross Operating Profit 791,000
Rent, Rates and Insurance 182,000
Depreciation 123,000
Net Operating Income 486,000
Interest Expense 102,000
Income Before Tax 384,000
Tax © Chris Guilding $ 110,000 13
Net Income $ 274,000
6. Organisational forms

Three main types of commercial organisation:

•Sole proprietorship
•Partnership
•Company

1. Sole proprietorship

• Owned by one person

• Sole proprietorship is not legally distinct from the
owner. So the owner has full responsibility for all debts
of the business (ie, owner has unlimited liability).
 6. Organisational forms

2. Partnership
• Similar legal status to sole proprietorships, however partnerships are
owned by two or more people.
• Like sole proprietorships, partnerships have unlimited liability, with
partners responsible for all debts of their partnership business.

3. Company
• A company is legally distinct from its owners (ie its shareholders).
• For public companies, owners can liquidate their ownership by selling
their shares on the stock market.
• The liability of owners is limited. The most owners can lose is the cost
of their shares, which might become worthless, if the company were to
become bankrupt.