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Chapter 2 Essay

2315 words - 10 pages

HOTEL EXPENSE ACCOUNTING

In the accounting terminology, expense is an income statement account representing the cost of items consumed in the process of generating revenue (ex. Cost of Goods Sold) or that expires due to the passage of time (ex. Depreciation Expense). Expense cannot be mixed with expenditure. For, Expenditure represents the purchase amount (whether paid in cash or credited with the Accounts Payable) of a certain asset. To illustrate, suppose, on January 1st, 2001, XYZ Company paid $ 10,000 cash in order to purchase some equipment this is called expenditure and is journalized as follows:

Cash $ 10,000
Equipment $ 10,000

However, on December 31st, 2001, ...view middle of the document...

In fact, revenue generator departments are classified into two: Service Type departments versus merchandising departments. Service type departments are revenue generators making money from solely providing services (Ex. Rooms Division department). On the other hand, merchandising departments ensure revenue by getting use of certain raw material, processing it, and than sell the final product (Ex. F&B department, Telephone department…). Therefore, only merchandising departments have a direct expense called Cost of Sales.

• Indirect Expenses: These are the expenses that do not vary with the level of production, or variable costs that can not be feasibly distributed to various Financial Reporting Centers. In the hotel industry, indirect expenses are, hence, divided into two different categories:
1. Fixed Charges: Examples might include rent, insurance, property taxes, and interest expense. For, these very expenses are incurred for the benefit of the hotel as a whole not for the benefit of each single department. To illustrate, if a hotel insures itself against fire, theft and burglary, and one day some valuable equipment has been stolen, from any department whatsoever, the insurance company will indemnify the hotel.
2. Undistributed Expenses: Examples might include electricity, energy, and water expenses. For, usually the hotel receives a total energy bill to be paid. In the old days, some hotels went for allocating this amount according to certain factors (ex. Surface, Department Usage…). However, this practice proved to be misleading, since it might under-allocate energy expenses for some departments and over-allocate it for others. Nowadays, most of the hotels decide not to allocate such expenses any more. Rather, hotels report such expenses in separate schedules.
At this stage, departments of a typical hotel would be listed along with their various related direct expenses. Later, examples of fixed charges and undistributed expenses would be discussed. Last, a bracket would be opened to discuss one of the most important Direct Expenses in any hotel, which is Payroll and Related Expenses. For, hotels being described as labor intensive companies devote a big percentage of their financial resources to such an expense.

I- Typical Hotel Departments:

1. Rooms Division Department: It is the place where guests receive several kinds of services ranging from reservation, registration, to checkout and settlement of their accounts. This department typically compromises a Rooms Division manager, an assistant manager(s), registration clerks, cashiers, mail and information clerk, and uniform service personnel.
The various types of Rooms Division department direct expenses include:[1]

( Commissions expenses: This account includes payments by the hotel to authorized agents that bring room business to the hotel. Usually at the end of each month, hotels sit with these agents in order to reconcile their monthly sales figures and authorize...

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