Chapter 1

Introduction to Managerial
Accounting

Hospitality Industry
Managerial Accounting

Eighth Edition
Hospitality Industry Overview

• Encompasses businesses that

provide products and services,
usually to both the traveling
public and to local residents.
• Examples include hotels, motels,
inns, restaurants of all kinds,
resorts, country and city clubs,
and much more.
Slide 2
Key Traits of the
Hospitality Industry
• Seasonality of business: activity varies not only
by time of year, but also by day of the week and
time of the day.
• Short distribution chain and time span: Hospitality
products and services are often produced and
consumed at or nearly at the same time.
• Labor intensity: Automation does not
substantially reduce the need for people in
delivering hospitality products and services.
• Fixed asset intensity: Most hospitality businesses
have a large investment in one or more buildings,
furniture, fixtures, and equipment.
Slide 3
What Is Hospitality
Accounting’s Function?
• The major role of hospitality accounting is
to provide information to the many users
of accounting information, both internal
and external.
• Internal users include department
managers, who need accounting
information and reports to better manage
their departments.
• External users include financial institutions
and potential investors, both of which rely
on financial statements to help guide their
decisions. Slide 4
Uniform Systems of Accounts

• Uniform accounting systems, commonly

called uniform systems of accounts,
provide the management of hospitality
organizations with turn-key accounting
systems.
• Uniform systems have been tested over
time and refined to meet ever-changing
needs.
• Separate uniform systems of accounts
are available for the lodging industry,
Slide 5
Generally Accepted
Accounting Principles
• Cost
• Business entity
• Continuity of the business unit (going concern)
• Unit of measurement
• Objective evidence
• Full disclosure
• Consistency
• Matching
• Conservatism
• Materiality
Slide 6
The Cost Principle

• Purchase transactions are recorded

at cost. The value recorded on the
books is a function of the agreed-
upon price between buyer and seller.
• This is true even if the same item
could have been purchased for less
from a different seller and even if the
item could be resold immediately for
more than it cost.
Slide 7
The Business Entity Principle

• Each business is a separate

business entity that maintains its
own set of records.
• These records are kept separate
from the owners’ other financial
interests and records.

Slide 8
Continuity of the Business Unit
Principle
(or the Going Concern Principle)

• It is assumed that the business will

continue to operate.
• A business’s true value lies in its ability
to earn a profit, not what its assets
would sell for in a liquidation.
• For this reason, the market value of
property and equipment does not
appear on financial statements unless
there is a reasonable likelihood of
liquidation revealed in notes to the
financial statements.
Slide 9
The Unit of Measurement Principle

• Financial statements are

expressed in monetary terms.
• The monetary unit is assumed to
represent a stable unit of value
so that past and current periods
can be included on the same
statements for comparison.

Slide 10
The Objective Evidence Principle
• Accounting transactions should
be based as much as possible on
objective evidence, such as
invoices and cancelled checks.
• When estimates must be made
of value, objective estimates by
disinterested third parties such
as professional appraisers are
preferred.
Slide 11
The Full Disclosure Principle

• Financial statements must fully

disclose all facts pertinent to the
interpretation of those
statements.
• This disclosure is done in the
body of the statements and in
the notes to the financial
statements. Slide 12
The Consistency Principle
• Various accounting methods and approaches
are available. For example, there are several
methods of depreciation.
• Once an accounting method has been
chosen, it should be used consistently unless
there is good reason to change it. This allows
users to make reasonable comparisons across
several periods.
• If a change in method is deemed necessary, it
must be disclosed in the notes to the financial
statements.

Slide 13
The Matching Principle
• Expenses must be matched with the
related revenues they help generate.
A piece of equipment expected to last
five years might be paid in full at
purchase, but it will help generate
revenue for five years. Therefore, the
cost of the system is written off over
the five-year period.
• The matching principle applies to
accrual basis accounting, but not to
cash basis accounting.
Slide 14
The Conservatism Principle
• Expenses should be recognized as
soon as possible, but revenues
should be recognized only when
they are ensured.
• This principle results in cautious
financial statements that are less
likely to overstate net income.
• This principle also is seen in the
valuation of inventory at the lower
of cost or current market value.
Slide 15
The Materiality Principle
• Events or information must be recorded if
they are material—that is, if they are large
or important enough that they would
matter to the user of the financial
information.
• This is commonly applied to the purchase
of fixed assets. Items that last longer than
one year are typically recorded as fixed
assets and depreciated. However, items
under a given dollar amount may be
deemed immaterial and expensed. They
are not worth the effort
Slide 16
to track and
The Revenue Recognition
Principle
• The revenue recognition principle determines
when revenues are to be reported.
• Under cash accounting, revenues are recognized
when cash is received.
• Under accrual accounting, revenues are
recognized when the related goods or services
are provided and payment is reasonably assured,
regardless of when the cash related to the sale is
received.
• Accrual timing differences make it necessary to
use accrued revenue accounts (when revenue is
recognized before cash is received) and deferred
revenue accounts (when revenue is recognized
Slide 17
Revenue Recognition Criteria
The criteria used to identify the critical
event for recognizing revenue include:
1. Risks and rewards are transferred from
seller to buyer.
2. Seller relinquishes control over the
goods sold.
3. Collection of payment is reasonably
assured.
4. The amount of revenue can be
measured.
5. The related cost ofSlideearning
18 the revenue
Reporting Revenue on a
Gross Versus Net Basis
How should a hospitality firm report revenue
on the sale of goods or services supplied by
another business?
• If the hospitality property is acting as an
agent, then net revenue is reported.
• If the hospitality property is acting as a
principal, then gross revenue is reported.
• This determination is made by examining
a series of indicators and their relative
strength.

Slide 19
Indicators of Net Revenue
Reporting
1. The supplier (not the hotel) is
responsible for fulfillment. Hotel
marketing should provide evidence to
the guest that the supplier is responsible
for fulfilling the ordered good or service.
2. The amount the hotel earns is fixed; that
is, the hotel receives a fixed amount or
percentage per sale.
3. The credit/collection risk resides with the
supplier.
Slide 20
Indicators of Gross Revenue
Reporting
1. The hotel is responsible for fulfillment.
2. The hotel is responsible for collecting the sales price
and must pay the supplier whether or not the guest
pays.
3. The hotel determines the nature, type,
characteristics, or specifications of the goods or
services ordered by the guest.
4. The hotel has multiple suppliers and selects the
supplier to deliver the goods or services when
ordered by the guest.
5. The hotel has the general inventory risk.
6. The hotel has latitude in setting the price.
7. The hotel adds meaningful value to the goods or
Slide 21
Cash Versus Accrual Accounting

• Cash basis accounting recognizes

transactions at the point of cash inflow or
outflow, regardless of when the revenue was
earned or when the expense was generated.
Cash basis accounting is used only by very
small operations.
• Accrual basis accounting recognizes revenues
when earned (regardless of when the cash is
received) and expenses when incurred
(regardless of when they are paid). Accrual
accounting recognizes many expenses over
the course of a year through the use of
adjusting entries. Slide 22
The Six Branches of Accounting

• Financial accounting
• Cost accounting
• Managerial accounting
• Tax accounting
• Auditing
• Accounting systems

Slide 23
Fundamental Accounting Equation

Assets = Liabilities + Owners’

Equity

Slide 24
Debits and Credits
• Every account has two sides—the debit (left)
side and the credit (right) side. “Debiting an
account” means adding an entry on the left
side. “Crediting an account” means adding an
entry on the right side.
• Every transaction results in entries in two or
more ledger accounts, and the total debit and
credit amounts for the transaction must be
equal.
• In any given account, the difference between
debits and credits is known as the account
balance. Slide 25
Normal Account Balances
Asset—debit
Liability—credit
Owners’ Equity Permanent—credit
Owners’ Equity Revenue—credit
Owners’ Equity Expense—debit
Debits increase asset and expense account
balances, but reduce liability, permanent equity,
and revenue account balances.
Credits reduce asset and expense accounts, but
increase liability, permanent equity, and revenue
account balances.
Slide 26
The Accounting Cycle
1. Record transactions in journals.
2. Post amounts from journals to ledger
accounts.
3. Prepare a trial balance.
4. Prepare adjusting entries.
5. Post adjusting entries.
6. Prepare an adjusted trial balance.
7. Prepare the financial statements.
8. Close the revenue and expense accounts.
9. Prepare the post-closing
Slide 27 trial balance.
Forms of Business
Organization
There are four basic forms of business organization:
• A sole proprietorship is owned by a single
person.
• A partnership is a business owned by two or
more people.
• A corporation is a business organization
incorporated under the laws of a government
entity. It is a legal business entity separate from
its owners.
• A limited liability company combines the limited
liability of a corporation with the favorable tax
treatment of sole proprietorships and
partnerships. It maySlide
have
28
an unlimited number