Introduction
The hospitality industry includes a wide range of hotels, from small, family-run bed and breakfasts to large international chains. Regardless of their size, they all face similar characteristics and challenges.
One of the challenges is that they operate around the clock and require reliable financial information to manage their businesses. Hotel accountants provide this financial information using a mix of accounting principles and industry standards, and the whole process is referred to as hotel accounting.
Here, we discuss all you need to know about hotel accounting. This blog is a complete guide on hotel accounting with its meaning, types of hotel accounts, financial statements of hotel accounting, importance, challenges, and software.
What is Hotel Accounting?
Hotel accounting involves monitoring your hotel's finances and performance, making it easier for management and stakeholders to make informed decisions.
Hotel bookkeeping may also implicate correcting underperformance and giving recommendations on your hotel's financial strategies. Your hotel may struggle to achieve successful income management or sustainable business without good accounting.
Accounting consists of recording and organizing a business's financial transactions to give stakeholders information about the business's financial health. Managers use financial reports for analysis and decision-making. Financial statements are important for investors, lenders, and stakeholders to assess the business’s progress.
Hotels in the United States follow the same accounting principles as other businesses such as Generally Accepted Accounting Principles (GAAP) while hotels worldwide use International Financial Reporting Standards (IFRS).
Hotels also follow the Uniform System of Accounts for the Lodging Industry (USALI) guidelines in addition to GAAP and IFRS. Some hotels use cash-based accounting, while most use accrual-based accounting. These guidelines aim to standardize financial classifications and industry language for easier comparison between hotels.
Still, hotel accounting is different from general bookkeeping. Let’s discuss more about it.
How is hotel accounting different?
Four fundamental industry dynamics have an impact on hotel accounting procedures and make them different from those of general bookkeeping:
- First, Hotel ownership can make accounting more complex, requiring an understanding of partnerships, franchises, and corporations.
- Second, it's common for hotels to hire external property managers to handle their financial needs, along with other services.
- Third, Hotels rely heavily on efficient management systems to track bookings and make the most of their rooms. The way hotels handle accounting, especially recognizing revenue, can be greatly influenced by how well their management and accounting systems are integrated.
- Fourth, many hotels provide services beyond just accommodation, such as restaurants, events, and tours. They maintain separate records for each service, making it challenging for hotel accountants to manage income and expenses efficiently.
Therefore, the hotel accounts are different, and you need to know about the types of hotel accounts.
What are the types of hotel accounts?
A hotel usually maintains three types of accounts:
1. Guest accounts
Records of transactions between guests and the hotel, such as room service requests.
2. Non-guest accounts
Accounts of hotels and non-guest clients.
3. Management accounts
Reports that provide an overview of the hotel's financial health to managers, owners, and stakeholders, usually on a quarterly or bi-monthly basis.
These reports are essential for creating financial statements to help manage the business effectively. Indeed, within these three categories, there can be a wide range of different records and data that are maintained.
For instance, your hotel may have separate records for bar sales, restaurant sales, room service, room rentals, amenities rental, and more. This enhances visibility and accuracy in reporting when assessing performance.
What is the chart of accounts (COA) for hotel accounting?
The chart of accounts (COA) for hotel accounting is a list of all the financial records for your hotel. It shows what records you have and tracks to make sure your business is healthy.
The chart of accounts typically consists of Revenue, Expenses, Assets, Liabilities, and Equity. This is not the exact way you want to organize your hotel accounting, but these metrics are a good starting point for your list of accounts depending on your business and your needs.
However, you could create a different chart of accounts for each account mentioned to make it easier to examine your hotel's performance in detail.
Hereafter, we can discuss the financial statements prepared in hotel accounting.
Financial Statements in Hotel Accounting
Hotels prepare a standard set of financial statements such as balance sheets, income statements, cash flow statements, equity statements, and supporting notes.
Hotel financial statements usually show a comparison between the current period and the same period in the previous year, or between the current month and year-to-date data. The USALI standards guide how hotels organize their financial statements, ensuring consistency in presenting data for easier comparison. USALI standards are crucial when providing details for different sections of a hotel, like room reservations and dining expenses.
1. Balance Sheet
A financial statement displays a business's financial position by listing assets, liabilities, and equity. Here, the equation: Assets = Liabilities + Equity is crucial in accounting and a balance sheet is a record of assets at a specific point in time.
Hotel balance sheets include unique items like food inventory, guest ledger, operating equipment, key money, and more, along with generic items like cash and debt. The guest ledger shows what each in-house guest owes while operating equipment including dishes and uniform inventories. Key money is the deposit a hotel manager gives to guarantee a management agreement.
2. Profit and Loss Statement
A business's profit and loss statement (income statement) shows its revenue, expenses, and profit or loss for a specific period, usually known as a P&L statement.
A Profit and loss statement is important because it indicates a business's financial health by summarizing all income, expenses, and profits over a period, unlike a balance sheet which shows a summary at a specific time.
Hotel Profit and Loss Statements frequently pursue a multistep income statement format, including departments like room rentals, food and beverage, gift shops, spas, and laundry services, depending on what is useful for stakeholders.
3. Cash Flow Statement
The cash flow statement shows how money comes in and goes out of a company over a while. It helps determine if a company has enough cash to cover its expenses. Cash flow statements categorize cash inflows and outflows into operating, investing, and financing activities.
Hotel managers can use cash flow statements to see if they have enough cash to meet their financial obligations. Examples of cash inflows for hotels include guest receipts, event receipts, and charges for services. Outflows may include utility bills, payroll, and costs for supplies.
Investing activities on hotel cash flow statements may include renovations or equipment purchases. Cash flow activities could involve changes in property mortgages or profit distributions to owners.
4. The Equity Statement
The equity statement, also called the statement of changes in equity, focuses on changes in each equity account on a company's balance sheet. These accounts include stock, capital contributions or withdrawals, and retained earnings.
Similar to the cash flow statement and income statement, the equity statement covers a specific period and is usually prepared like a reconciliation, the equity balance at the beginning of the period is adjusted and changed by transactions recorded during the period to arrive at the closing balance for the period.
For instance, transactions that increase or decrease a hotel's equity balance include the issuance of common stock, hotel partner capital contributions, distributions to owners, payments of dividends, and any foreign currency translation adjustments.
Often, a hotel's retained earnings account becomes a highlight of its equity statement. Undistributed net income and losses from the income statement accumulate in the retained earnings account, which, in turn, provides a good indication of a hotel's ability to internally fund future growth.
5. Supporting Notes
The financial statement notes have a different look and content compared to the rest of the financial statements. They offer more detailed information about specific items in the financial summaries, following specific GAAP guidelines.
The notes can be presented separately or as numbered explanations within the financial report. These notes clarify the hotel's accounting methods and provide extra details about the figures in the financial statements, discussing important topics not included in the statements themselves, such as legal disputes. For instance, a basic note might outline the hotel group's brands, number of hotels, and locations.
Why is hotel accounting so important?
Hotel accounting plays a crucial role in understanding the financial status and direction of your hotel. It helps you understand your income, profits, and other financial aspects that affect your property's operations. Accounting greatly benefits budgeting, forecasting, and cost planning.
Without proper accounting, it's hard to track your hotel's finances, identify overspending, and seize opportunities. Poor financial management can lead to debt and even business failure.
If you don't keep records, it's tough to monitor your hotel's money flow, pinpoint excessive spending, and capitalize on opportunities. Inadequate bookkeeping can result in debt and even business collapse.
Therefore, it should be your priority task while managing the hotel business in the US. however, you may think about how to maintain these many accounts for your hotel. Look ahead, here are some tips for maintaining accounts in hotels.
How to maintain accounts in hotels?
Successful hotel accounting is essential for the smooth operation of your property. It's a non-negotiable task if you want things to run properly month after month and year after year.
Follow these tips for keeping your accounts clean and tidy:
- Maintain a current balance sheet that gives details about your hotel's assets, liabilities, and equity at any given time.
- Utilize benefit and misfortune explanations because it's imperative to comprehend whether you're losing or bringing in cash and how much.
- Utilize cash flow reports to prevent excessive debt. If your income and expenses are not in sync, you run the risk of losing some aspects of your business.
- Advanced training for employees is essential if you have an in-house accounting department. You must ensure that employees have the necessary qualifications and are using the best software. If not, you can outsource your accounting to a group of local experts.
- Track key performance indicators (KPIs) and metrics. It will help your overall performance and make accounting hassle-free.
- Implement an effective revenue management strategy to keep a record of generated revenue.
- Use Computerized accounting software to make work more straightforward. It saves time, provides data that is more accurate, and makes insights easier to understand.
Key hotel accounting procedures
When you begin working with an accountant or your internal finance team, you should establish some key goals, such as:
- How many accounts do you need to handle?
- What information do you want to track?
- How do you plan to record the information?
- Which reports should be used?
- How often should be reporting completed?
Organizing and documenting these steps will ultimately increase your efficiency in hotel accounting and help you make them a part of your hotel's standard operating procedure.
Hotel Accounting Metrics
Hotels must closely monitor operating metrics because their main product, room rentals, is limited and perishable. Hotels with additional income streams also need to track the productivity of each one. The accounting data can be optimized accurately by using USALI standards and tools. This enables hotels to create dashboards with reliable, useful metrics or key performance indicators (KPIs) that can be compared to those of other hotels or industry standards.
Here, 11 standard hotel metrics are listed below, along with their respective formulas. To illustrate the metrics accurately, the explanations refer to the following standard data for a hypothetical hotel, Paradise Hotel, a luxury hotel with 20 rooms and a restaurant.
On May 16, 2024, the financial details are as follows:
- Total room revenue on 5/16/2024: $6,000
- 12 rooms were sold on 5/16/2024.
- Restaurant revenue on 5/16/2024: $1000
- Food and beverage cost of goods sold (COGS) on 5/16/2024: $300
- Operating expense per room night: $80
- Daily payroll cost: $800
- $600,000 in annual net operating income.
- Annual debt service: $250,000.
Let’s calculate the standard hotel metrics using these financial data and understand the basics of hotel accounting.
1. Average Daily Rate (ADR)
ADR is a key metric for hotels to measure their revenue per occupied room. It provides a comprehensive view of the rate at which rooms are sold, allowing for comparisons with other hotels and insights into market demand and seasonality.
The formula for ADR is total room revenue divided by room sales.
For instance, if Paradise Hotel made $6,000 from 12 occupied rooms on May 16, 2024, the ADR for that day would be $500 ($6,000/12)
2. Rooms Available
The hotel's available rooms are like its inventory. The hotel's inventory is limited based on the number of rentable rooms and nights.
For instance, on May 16, 2024, Paradise Hotel had 20 rooms available. The equation for calculating rooms available for a month is Rooms available = (Total rooms – out of service room) x Total days in a month.
In a monthly analysis, 600 rooms (20 rooms x 30 days) would be available at Paradise Hotel. However, if one room was unavailable for three days, the number of monthly rooms available would be reduced to 570 = (20 – 1) x 30.
3. Occupancy Rate
The occupancy rate is the percentage of rooms that were occupied at the same time. It is important to have a high occupancy rate because empty rooms mean lost revenue that cannot be regained. Ideally, all rooms should be sold, but in 2024, the average hotel occupancy rate in the United States is expected to be 63.6% according to PwC.
The formula to calculate occupancy rate is Occupancy rate = (Number of rooms sold/Total rooms available) x 100.
Therefore, on May 16, Paradise Hotel had an occupancy rate of 60% [(12/20) x 100] with 12 out of 20 rooms sold.
4. Revenue per Available Room (RevPAR)
RevPAR measures a hotel's ability to generate revenue from its room inventory. It considers both ADR and occupancy rates. The equation is RevPAR = ADR x Occupancy rate. Therefore, the RevPAR for the Paradise Hotel on May 16 was $300 ($500 x 60%)
5. Total Revenue per Available Room (TRevPAR)
TRevPAR considers all revenue a hotel makes, not just room revenue. It helps hotel managers see how much money they're making from rooms and other sources like parking and food. The formula is:
TRevPAR = Total revenue/Total rooms available
So, the TRevPAR for the Paradise Hotel on May 16 was $350 [($6,000 + $1000)/20]
6. Gross Operating Profit per Available Room (GOPPAR)
GOPPAR is a metric that considers a hotel's gross operating profit rather than its top-line revenue. Net operating profit is the income that remains after deducting direct operating expenses. Direct operating expenses for hotels include items such as leases, rent or mortgage payments, utilities, and wages. The formula also takes into account the occupancy rate by using the total rooms available as the point of reference. The formula is:
GOPPAR = (Total room revenue – Operating expenses)/Total rooms available
The Paradise Hotel's accountants calculated that the operating cost for each room was $80 per night. So, GOPPAR for May 16 was calculated at $249 or [($6,000 – ($85 x 12)]/20
7. Cost of Goods Sold (COGS)
COGS means the direct expenses of producing a product for sale, not the broader range of operating expenses needed to run a business.
While COGS does not apply to a hotel's main room-rental revenue stream, similar room-related expenses are usually called direct costs or costs of sales. Hotels typically track COGS separately for each of their secondary revenue streams.
For example, the hotel's COGS would include various costs such as direct labor costs for chefs, bartenders, and service staff, as well as other direct costs incurred to produce the meals and beverages. The most common COGS formula is COGS = Beginning Inventory + Purchases During the Period - Ending Inventory.
The hotel's inventory accountant calculates inventory costs to determine COGS by adding up the value of inventory items sold. Here, hotel owners can refer to the USALI chart of accounts to know which account balances to consider for each revenue stream.
8. Food Cost Percentage
Food and beverage sales are typically managed separately to track revenue and costs more effectively. This is because they are a major part of a hotel's business. The food cost percentage is calculated by comparing the revenue from food and beverage sales to the cost of the ingredients. This cost should ideally be between 28 and 32 percent of the total food and beverage revenue. The food cost rate equation is:
Food cost percentage = (Total food costs/Total food revenue)x100
Thus, Paradise Hotel’s food cost percentage is 30%, or ($300/$1000)x100.
9. Labor Cost Percentage
Labor costs make up a large part of a hotel's overall expenses, sometimes reaching as high as 50% of total costs. To manage these costs, one approach is to monitor them as a percentage of revenue. This percentage can be compared to different periods or to rates at other hotels to measure effectiveness.
Labor costs include wages, commissions, bonuses, employee benefits like vacation time, employer contributions to payroll taxes, and allocations for health insurance and retirement plans.
Hotels examine labor cost percentages for the entire hotel, by department, and by revenue stream (such as the percentages that differentiate room labor from restaurant labor). The labor cost percentage formula is:
Labor cost percentage = (Total payroll cost / Total revenue) x 100
Paradise Hotel’s overall labor cost is 13.33%, or ($800 / $6,000) x 100.
10. EBITDA
EBITDA is a key financial measure used to evaluate a company's profitability. By adding back interest, taxes, depreciation, and amortization to the net income (or loss) from a hotel's P&L, EBITDA can be easily calculated. Many financial investors, analysts, and business managers consider EBITDA to be a more accurate representation of a business's operational strength compared to net income, as it is not affected by ownership structure, tax laws, and non-cash accounting expenses like depreciation and amortization. EBITDA is particularly useful when comparing the performance of hotels in different tax jurisdictions.
Formula: EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization.
11. Debt Service Coverage Ratio (DSCR)
DSCR is important for hotel owners and lenders because it illustrates the connection between a hotel's net operating income and its debt service. A higher DSCR indicates a borrower's ability to repay a loan, giving lenders more confidence. Hotel owners can also use DSCR to assess the cash flow impact of taking on additional debt. The net operating income used in DSCR calculations focuses solely on revenue and expenses related to daily business operations. Debt service refers to the total loan payments, including principal and interest. DSCR is typically calculated annually using a specific formula, which is DSCR = Net operating income / Annual debt service
Paradise Hotel makes $2.40 for every $1 spent on debt service due to its DSCR of 2.4 ($600,000 x $250,000)
Important Roles in Hotel Accounting
Accounting is not usually considered a career in the hotel industry, but it is crucial for keeping a hotel financially stable. The specific tasks and responsibilities may vary, with larger hotels having separate staff for each role, while smaller hotels combine duties into fewer positions for their accounting requirements. Some hotels also hire an accounting firm to handle these roles. However, there are important hotel accounting roles for seamless accounts management for hotels.
1. Hotel Accountant
Hotel accountants are essential for managing financial accounting transactions and possessing GAAP/IFRS and USALI expertise.
2. Accounts Payable (AP) and Receivable (AR) Clerk
AP clerks ensure vendor bills are accurate, authorized, and paid promptly, while AR clerks focus on getting bills to customers, processing payments, and invoicing corporate, group, and event billings.
3. Night Auditor
The night auditor role is essential for hotels to handle customer service. His accounting responsibilities are 24 hours every day without any day off throughout the year.
4. Financial Controller
The financial controller of a hotel is responsible for overseeing all accounting functions, monitoring internal controls, preparing financial statements, budgeting, forecasting, cash management, and working with tax and audit preparers.
5. Payroll Manager
Hotel payroll managers must ensure that new hires and terminated employees are correctly set up, and paid accurately, and withholdings and adjustments are correctly processed.
6. Inventory Accountant
The inventory accountant is in charge of keeping precise physical inventory counts and assigning costs using the right inventory methodology, such as first in, first out (FIFO), or last in, first out (LIFO).
7. Revenue Manager
Revenue managers are responsible for managing and monitoring room sales and rates to maximize revenue, relying on financial, analytical, and marketing skills.
8. Chief Financial Officer (CFO)
CFOs are responsible for managing the financial well-being of a firm, driving top-line growth, increasing operating efficiency, and spotting trends in the marketplace.
After understanding the roles, let’s learn more about the challenges these roles face in hotel accounting.
Hotel Accounting Challenges
Hotel accounting is different from other industries and has dynamic challenges in its operations of accounting. Some operational challenges can be described below:
1. Continued Tasks
Hotels are always open except for the off-season. It means there are constant transactions and all staff must focus on serving customers at all times even when accountants are finalizing reports.
The night auditor helps ease the pressure of non-stop operations on both staff and accounting systems, but automated software is also crucial.
2. Various income Sources
Hotel establishments make most of their money from renting out rooms. However, other sources of income such as room service, meeting space rentals, on-site restaurant and bar sales, valet and parking fees, vending machines, massage services, gift shops, in-room minibars, and movie rentals can make up to half of their total income.
It's important to track each income source and its associated expenses separately so that they can be evaluated individually. This requires transactions to be coded and categorized accurately, using a comprehensive chart of accounts and well-trained accountants.
3. Adjusting Room Rates
Room rates at AR offices are always changing, making it challenging to charge clients accurately. Dynamic pricing, similar to the airline industry, adjusts rates based on demand, occupancy, and special events. Special group rates and additional charges further complicate billing. Fluctuating room prices not only complicates revenue tracking but also makes budgeting and forecasting more difficult.
4. Agent Agreements
Hotels work with many agents to support their operations. This can include food service, bar supplies, linens, security, technology support, laundry, disposables, and transportation.
Managing the large number of vendors can be difficult for a hotel AP clerk. It can also be challenging to track expenses when some vendors don't have contracts. Staying on top of contracts and payments is especially important to ensure the flow of goods and services is not interrupted.
5. Complicated Payroll Expenses
Managing payroll expenses for a hotel can be challenging due to the number of employees, high turnover rates, and various payroll plans. Even small hotels like Paradise Hotel require staff to work around the clock.
Additionally, payroll managers must handle new hires and process payments for departing employees, which is common in the hotel industry, especially after the pandemic. The variety of payroll plans, including salaried, commissioned, hourly, and tip-eligible, adds complexity even when using payroll processing software.
6. Compliance with Regulations
Hotels must follow many rules for operations and finances. The accounting team has a big job managing compliance and keeping up with regulation changes. Financial statements need to be accurate and organized for audits. Record-keeping is important for safety, security, and licensing requirements.
7. Demand for Managerial Accounting
The need for managerial accounting is a specialized form of accounting that focuses on creating customized reports and analyses to help management make more informed financial and operational decisions. It relies on the hotel's accounting data, along with other operational and industry metrics such as the various KPIs and metrics discussed earlier.
Managerial accounting can be particularly significant for hotels, as they use it to optimize profitability from their room inventory and their various revenue streams from other services, such as restaurants, laundry, and events.
Best Practices for Hotel Accounting
Hotels can reduce accounting challenges and risks by implementing best practices. These five strategies are especially helpful for hotels that manage their accounting without external property managers.
1. Better night audit
Accurate policies and procedures in a hotel accounting department are crucial for ensuring consistent and reliable night audits. Hotels can achieve this by documenting standard procedures, using quality checklists, implementing automated software, providing thorough training for night auditors, and regularly reviewing their work. It is also beneficial to train other staff members who can assist with night audits throughout the year.
2. Enabling hotel accounting system
Implementing an accounting system is crucial for hotels of all sizes. The high number of transactions, multiple vendors, and the necessity to separate various service P&Ls make using manual processes or spreadsheets impractical. Additionally, integrating the accounting system with other hotel software, such as point of sale (POS), payroll, and reservation systems, reduces the amount of data entry required from frontline staff and the accounting team, decreasing the likelihood of making manual errors.
3. Keeping records organized
Hotel bookkeepers must do more than just keep accurate records. They should also maintain organized backups and documents that support the hotel's financial transactions. Having a clear audit trail helps improve customer service and vendor relationships. It also reduces the time and effort needed to conduct various audits. Additionally, audit trails help prevent unauthorized or duplicate transactions, reducing the risk of errors that can affect the balance.
4. Having different ledgers
Instead of one general ledger (GL), it's better to have separate ledgers for each revenue stream in hotels. The chart of accounts organizes the company's accounts and values in the GL. Each subledger follows a similar structure as the GL and a summary of subledger activity is transferred to the GL regularly. By having distinct sub-ledgers for each revenue stream, profit center, and business line, financial transactions can be recorded accurately and balances can be easily tracked for analysis.
5. Selecting the right accounting method
There are pros and cons to both the cash-basis and accrual-basis accounting methods. The workload, expertise needed, and the quality of financial statements all play a role in determining the best method. The cash basis is simpler in theory and easier to maintain because transactions are recorded when cash changes hands.
This method requires less accounting expertise and may be suitable for a small hotel's financial reporting needs. However, the accrual basis of accounting is the only IFRS and GAAP-compliant method as it tends to more accurately reflect the true financial condition of a business. External lenders and investors typically require accrual-based financial reports. Additionally, GAAP compliance or IFRS compliance, depending on jurisdiction is required for public hotel companies.
Conclusion
As we have discussed so far, hotel accounting can be a challenging, complex, and time-consuming process for you, still, it is necessary and can impact your business if not handled properly.
Therefore, it is essential to get guidance from accounting experts on how to manage hotel accounting accurately.
At Virtue CPAs & Advisors, we have a qualified and experienced team of experts, who provide you with thorough guidance on accounting whether it is hotel accounting or any other business accounts.
We are one of the best accounting firms in Atlanta. Contact us today for comprehensive accounting and advisory solutions.