This Issue - Icwai

COVER COVER ARTICLE
ARTICLE
foodservices, private clubs, casinos, meeting
management, exhibition (trade show) management
and special event management.
Accounting in the hospitality industry
Given the kind of service and products dealt in by
the hospitality industry, the accounting needs of the
industry appear to be quite special. As ever, an
accountant of a typical hotel plays his traditional role
—recording financial transaction, preparing and
interpreting financial statements, and providing
management with necessary information for timely
actions. He keeps track of the revenues and expenses
of the food and beverage department. The food and
beverage department provides the foodservices, but
the accounting department is responsible for collecting
revenues. In short, the accounting function permeates
in the day-to-day operations of the hotel industry. It
is responsible for collecting and reporting most of a
hotel’s operational and financial statistics.
But suppose, if one hotel operator states that his
gross profit from operations is 70 percent, what will
it exactly mean to another operator, and for that
matter, to the users of accounting information by and
large? How does the industry deal with its revenue
streams from rooms, restaurants, conference and
banqueting services, leisure facilities, etc. and how
does it match the expenses in relation to these
revenues? In short, what is the Generally Accepted
Accounting Principles (GAAP) for hotel industry?
Accountancy profession needs GAAP or a
benchmark against which to compare its own
performance over time or the performance of others
vis-à-vis its own. The key in making comparisons —
whether they are against budgets, results of prior
periods or results of other businesses — is that all
figures should be comparable on a consistent basis.
Moreover, the credibility of the accounting profession
greatly depends on the consensus among its users. It
was, however, not before 1932 that the New York
Stock Exchange focussed on the need for some kind
of “accepted accounting principles”. By 1938, the
Great Depression (1929-1939) in the USA and related
developments in the field of accounting led to the
coinage of the term “Generally Accepted Accounting
Principles”. But it was not before 1965 that Paul Grady
published his “An Inventory of Generally Accepted
Accounting Principles in the United States”.
In juxtaposition to this development in the
accounting history, probably unbeknownst to many
of us and, of course, much ahead of the mainstream
accountants, the hospitality industry in the United
States made its foray into a common accounting
solution for its members. In 1926, the Hotel
Association of New York City published the first
edition of its accounting manual “The Uniform System
of Accounts for Lodging Industry” (USALI), which is
a wellspring of guidelines for preparing accounting
standards and reporting practices that reflect
terminology and activity unique to the hospitality
industry. With seventy years of history and experience
and ten editions (Educational Institute of AH&LA
2006) behind it, this venerated source of hotel
accounting manual is being widely followed by the
major US hotel chains around the world. Some leading
practitioners of this system are Holiday Inn, Marriott,
Copthorne, InterContinental, Sheraton, Hyatt and
Whitbread. Those using a slightly amended version
are Forte and Hilton. Those using their own method
are believed to be Mount Charlotte, De Vere and
Jarvis. This means that virtually all of the main hotel
companies in the UK and the USA use the Uniform
System as the basis of their accounting and reporting
system (Chin and Braney : 1995).
How USALI works?
First of all, USALI sets forth detail recommendations
on how particular transactions should be dealt
with in accounting terms. In its content, USALI is a
highly departmentalized system of accounting with
firm moorings on Departmental Income Statement.
Functionally, hotel accounting can be broken down
to two core segments: Operating and Overhead. The
operating segment is the revenue producing
departments and includes rooms, food, and beverage,
telecommunications and similar operations. The
overhead departments are administrative and general
functions, data processing, human resources,
transportation, marketing, guest entertainment,
energy costs, and property operations and
maintenance. Taken together, USALI can produce up
to thirty departmental statements (Popowich, Taylor,
and Sydor, 1997). USALI then integrates all these
departmental statements into a summary statement
of income (or simply, Income Statement). The
Summary Income Statement consists of three parts:
(a) The upper part relates to the departmental
operations. It captures revenues from the relevant
departments and from the net revenues of each
department it then deducts departmental costs,
departmental wages, related expenses and other
departmental expenses in order to arrive at the
departmental income or loss.
(b) The second part of the summary statement
of income then lists the “Undistributed Operating
Expenses”. The total of these expenses are deducted
from the total departmental income to arrive at income
before fixed charges. The available surplus at this stage
752 The Management Accountant |September 2011