What Are the Accounting Procedures in the Hospitality Industry?

by John Freedman - Updated September 26, 2017

As you sit down and take a bite of a tasty burger, you might not be thinking about the accounting journal entries that happened as that sandwich made it to your plate. Just like any other business, restaurants and hotels keep a set of accounting records and record journal entries to keep track of business transactions. However, as food sales for restaurants are not quite the same as normal goods being sold in a retail store and staying at a hotel isn't exactly goods or service, it is important to understand that the accounting differs slightly.

Recording Revenue

In the hospitality industry, revenue recognition is fairly straightforward. For both restaurants and hotels, revenue is earned when the meal or the hotel stay occurs. It is important to note that reservations often include a deposit for the first night's stay. As this deposit has not yet been earned, these deposits are not revenue yet. Payments received for deposits are considered deferred revenue until they are earned.

Costs of Sales

Major costs in the hospitality industry include costs of food and labor. Food costs, depending on the type of restaurant or resort, can be nearly half of a company's expenses. Costs of sales should be recorded in line with revenue recognized. For example, if a company serves 2,500 hamburgers in August that cost the company $4,000 and recognized $10,000 in revenue in August, then the cost of the hamburgers should be recognized in August as well. This entry would be recorded as a debit to cash and a credit to revenue for $10,000, as well as a debit to cost of sales and a credit to inventory for $4,000. Food that was unprepared as of the end of the month remains in inventory on the balance sheet.

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Operating Expenses

Non-guest and patron costs of the company are reflected in the company's operating expense accounts. When operating costs are incurred the company will make a debit to operating expenses and a credit to cash or accounts payable, depending on whether the purchase was made via cash or credit, respectively. Common operating expenses in the hospitality industry are rent, insurance and non-client service salary expenses.

Capital Purchases

Serving meals or taking care of hotel guests usually requires a fair amount of equipment. Industrial linen washers, stove tops, mixers and computers are all viewed as capital expenditures. These items, which benefit more than one accounting period, are recorded with a debit to fixed assets and a credit to cash at the time of purchase. Over the useful life of the equipment the item is depreciated. Depreciation entries are made with a debit to depreciation expense and a credit to accumulated depreciation. The accumulated depreciation and the fixed asset account offset each other on the company's financial statements, so the equipments' value is always reported as cost less accumulated depreciation.

References

  • "Intermediate Accounting"; Donald E. Kieso, et al.; 2007
  • "Managerial Accounting"; Ray H. Garrison, et al.; 2011

About the Author

John Freedman's articles specialize in management and financial responsibility. He is a certified public accountant, graduated summa cum laude with a Bachelor of Arts in business administration and has been writing since 1998. His career includes public company auditing and work with the campus recruiting team for his alma mater.

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