Accounting defined as the process of collecting, recording, summarizing, and analyzing financial transactions of a business. According to the American Institute of Certified Public Accountants (AICPA), ‘Accounting is an art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions, and events which are, in part at least, of a financial character, and interpreting the results thereof.’
The major functions of front office accounting system are as under:
- Creation and maintenance of guest and non-guest accounts accurately
- Tracking financial transactions of guests throughout the guest cycle
- Monitoring the credit limit of guests, and asking for a deposit from guests in case of high outstanding balance
- Preparing a high balance report for collection and informing the management about the same
- Providing an efficient management information system (MIS) to the management for departmental revenue generation
- Maintaining effective control over cash and credit transactions
- Front office accounting system records settlement for all goods and services provided.
Front Office Accounting System
The automated and/or manual data collection and reporting system that summarizes and documents the financial activities of a front office. The front desk maintains two types of accounts:
- Guest accounts
- Non-guest accounts
A guest account is the record of financial transactions between and a resident guest and the hotel. This account is created either during the registration of the guest (at the time of check-in) or during reservation, if the guest makes an advance payment.
A non-guest account is the record of the financial transactions that take place between a non-resident guest and the hotel. This is also known as a city account.
The front desk cashier also maintains other types of non-guest accounts, which include:
Guests who leave the hotel without the settlement of their accounts are known as skippers; their accounts are also treated as non-resident guest accounts. The account is transferred to the city ledger awaiting eventual payment, and after a stipulated wait time, the same is written off as a bad debt.
The status of guests, whose accounts are not settled by them (in case of bills to company), changes from resident to non-resident guests when they leave the hotel. The front desk cashier transfers the balance to the city ledger and the payment is collected by the accounts department.
When advance payment has been received for a guaranteed reservation and it is subsequently a no-show, the account is normally recorded in the city sales ledger
A folio is a statement of all the transactions that take place between a hotel and a guest. A folios is a statement of all transactions (debit & credit) affecting the balance of a single account. When an account created, a folio is assigned with a starting balance zero. All transactions, which increase (debits) or decrease (credits) the balance of the account is recorded on the folio. At settlement a guest folio should be returned to a zero balance by cash payment or by transfer to an approved credit card or direct billing account. The process of recording transactions on to a folio is called posting. There are basically four types of folios used in front office accounting:
- Guest folios: To record transactions made by an individual or independent guest with the hotel.
- Master folios: Accounts assigned to more than one person or guestroom: usually reserved for group accounts.
- Non-guest folios: Also known as semi-permanent folio. Accounts assigned to non-guest business or agencies with hotel charge purchase privileges.
- Employee folios: Accounts assigned to employees with charge purchase privileges.
- Split Folios – Accounts assigned to a guest on his/her request to split his/her charges and payments between two personal folios – one to record expenses to be paid by the sponsoring business company and the other to record personal expenses to be paid by the guest. In this case two folios are created for the same guest.
Every folio should have a unique serial number. Folio serial numbers are needed for many reasons. First, they serve as identification numbers that help ensure that all folios are accounted for during an audit of front office transactions. Second folio numbers may used to index information in automated systems. Automated systems frequently create folio numbers when reservations are made. Finally folio numbers can provide a chain of documentation.
A voucher details a single transaction to be posted to a front office account. This document lists detailed transaction information gathered at the source of the transaction. The voucher is then sent to the front office for posting onto the guest folio. Voucher is a supporting documents used only for internal control purposes. Usually any service or goods brought on credit by the guest has to be supported by a voucher. Most automated front office systems require few paper vouchers.
Types of voucher:
- Cash vouchers
- Travel agent voucher
- Commission voucher
- Charge vouchers
- Transfer vouchers
- Paid-out vouchers
- Correction vouchers
- Allowance vouchers
Visitors Paid-out Voucher: The money paid by the hotel on behalf of guests is known as visitors paid-out (VPO). A VPO is generally made for the following charges:
- Payment for taxi, travel agency services
- Porter charges
- Florist charges
- Postage and courier charges
- Emergency medical expenses
Travel Agent Voucher: In travel agent guaranteed reservation, the travel agent forwards a voucher to the hotel as proof of payment and guarantees that the prepaid amount will be sent to the hotel when the voucher is returned to the travel agency for payment.
Most tour operators and travel agencies receive advance payment from their clients for making travel arrangements like accommodation, food and beverage, and other services. The travel agency then makes the reservation in a hotel on behalf of the guest. It sends a voucher, known as a travel agent voucher, containing the details of the billing procedure and services to be provided to the guest. Airlines that have contracts with hotels also send meals and accommodation order (MAO) or passenger service order (PSO) for layover passengers due to delay or cancellation of flights. In these cases, the hotel obtains payments from the travel agency or airline.
Telephone Call Voucher : In small hotels, where outgoing calls are routed through the operator, the responsibility of billing the call charges lies with the telephone operator, who puts down the call details on a telephone charge voucher and sends it to the front desk cashier for posting into the guest account. Nowadays a lot of hotels use computerized systems, where, whenever a guest makes a call, the call accounting module automatically transfers the call charges to the guest folio.
Miscellaneous Charge Voucher: A miscellaneous charge voucher is prepared for the payment of miscellaneous services and facilities, like laundry, health club, fitness centre, beauty salon, etc. The guest verifies and signs the miscellaneous charge voucher, which is sent to the front desk cashier for posting the charges into the guest folio.
Cash Receipt Voucher: A receipt is an acknowledgment that a payment has been made. A cash receipt voucher is prepared and issued to the person depositing cash as a proof of remittance of the deposited cash.
Commission Voucher: Hotels offer commission to persons who provide regular business to them. Whenever a commission is paid by the cashier, a commission voucher is made. The commission voucher should be authorized by a competent authority of the hotel. Generally, it is authorized by the lobby manager. More commonly, commission vouchers are made for the following:
- A taxi driver who brings a walk-in guest to the hotel. In case the guest stays at the hotel, the hotel pays a commission to the taxi driver. A travel agent/tour operator working on commission basis
- Any agency working on a commission basis.
Guest Allowances : An allowance is an amount deducted from an invoice to compensate the buyer for an expense or mistake. The guest allowance is the cash paid to the guest by the hotel, especially in the following circumstances:
- If there is a wrong posting of a charge in the guest folio, an allowance is given and the voucher is made to nullify the guest folio balance due to the wrong posting.
- If a guest has deposited a large sum as advance and that amount exceeds the hotel bill.
- If an airline or a tour operator sends a crew or a group and guarantees the reimbursement of their bills.
Restaurant/Bar Check: Resident guests may enjoy their meals in any of the food and beverage outlets in a hotel. Whenever a guest consumes food or beverage in a restaurant, a bill is raised; in case a resident guest wishes to utilize the credit facility offered by the hotel, he should sign the bill. The signed bills serve as the proof of financial transactions at the food and beverage outlets and are treated as vouchers for posting the charges to the guest folio.
The front ledger is a collection of front office account folios. The folios represented in the front office are a part of the front office accounts receivable ledger. An account receivable represents money owed to the hotel. Front office accounting commonly separates accounts receivable into two subsidiary groups- the guest ledger (for guest receivables) and the city ledger (for non-guest receivables).
Guest Ledger: A guest ledger contains the details of all the financial transactions between a resident guest and the hotel, including charge purchases and the payments received from the guest. It has two parts—debit and credit. In a manual system, the financial transactions are recorded in a tabular ledger, or tab ledger, which is of two types:
- Horizontal tabular ledger
- Vertical tabular ledger
In a horizontal tabular ledger, all the credit expenses of the guest are recorded in one horizontal row, and at the end of the row, the guests’ credit or debit balance is shown.
The vertical row of the table contains the room numbers. At the end of vertical column, the daily sales balance can be seen. A vertical tabular ledger is a variation of the horizontal tabular ledger. It is also called visitors tabular ledger. The rows depict the room numbers, and in the columns, the details of the guests and their credit expenses as well as payments are recorded. At the end of every column, one can find the account balance of individual guests staying in a particular room. It is a loose sheet and is prepared on a daily basis by the front desk cashier.
City ledger: The city ledger also called the non-guest ledger is the collection of non-guest accounts. A city ledger contains the collective accounts of all the non-resident individuals/agencies to whom the hotel extends credit facility. It is also called non-guest account.
- City ledgers also contain the accounts of resident guests who have left the hotel without settling their accounts, which would be settled at a later date by a third party (may be a credit card company, an airline, a travel agency, or a corporate house).
- This account would be closed at the time of receiving the complete payment.
- The account of skippers is also maintained in the city ledger for a specific period (as per the hotel policy); at the expiry of this period the same is written off as bad debt and the account is closed.
- This ledger also includes bad cheque accounts (cheques that have bounced), disputed bills account (bills that are in dispute), late charges accounts (bills that could not be posted in the guest bill at the time of check-out), and retention charges accounts (reservation was guaranteed but the same was cancelled or guest did not show up).
Front Office Accounting Cycle
An important function of the front office accounting system is to maintain an accurate and up-to-date record of all the financial transactions (credit and debit) between the hotel and each guest, so that all the outstanding accounts are settled and the hotel does not lose any revenue. The front office accounting cycle has three distinct phases:
- Creation of accounts
- Maintenance of accounts
- Settlement of accounts
Creation of Accounts : A guest account is created when the first financial transaction between the hotel and a guest takes place. It may happen at one of the following stages:
- At the time of reservation, if the guest pays an advance amount
- At the time the hotel receives the advance payment for a booking after the reservation has been made and before the arrival of the guest.
- At the time of guest registration, when a room is allotted to the guest.
- A guest folio is created on the day the hotel receives a payment from the guest and the transactions are recorded in the order of their occurrence.
- The hotel sets a credit limit, known as floor limit, for each guest, which is the maximum amount of credit that the hotel will extend to the guest.
Maintenance of Accounts: All the monetary transactions that take place between the hotel and a guest are recorded in the guest folio in the order of their occurrence. An entry in the guest folio may be either debit or credit.
The most common debit entries in a guest account include the following:
- Room charges
- Food and beverage charges (restaurant, bar, coffee shop, room service, etc.)
- Telephone and fax charges
- Health centre, business centre, fitness centre charges
- Laundry charges
- Postage charges
- Transportation charges
- Visitors paid-out
Credit entries in a guest account may include the following:
- Pre-payment, in part or in full (at the time of reservation or between reservation and arrival).
- Part payment during the stay.
- Allowances given to the guest.
- Adjustments made in case of any error in posting in the guest folio.
- Final payment for the settlement of accounts at the time of check-out.
Settlement of Accounts: This is the final and concluding phase of the front office accounting cycle. The settlement of account means zeroing the balance in a guest folio. The formula for calculating the outstanding balance is:
Opening balance + Debit entries – Credit entries = Outstanding amount
At the time of departure, the final bill of the guest is prepared and settled in such a way that the outstanding balance is brought to zero. The settlement of the guest account may be by cash or credit. In case of credit settlement, the account balance is transferred to the city ledger and the responsibility of collecting the balance is transferred to the accounts department.
Charge purchase transactions must be correctly documented in order for the front office to properly maintain accounts. A major concern of the front office accounting process involves the communication of transactional information from remote point-of-sale to the front office.
A transaction initiates activity within the front office accounting system. The front office accounting system can be described as a transactional accounting system. Proper posting procedures depend on the nature of the transaction and its monetary value. A transaction can be classified as:
- Cash payment
- Charge purchase
- Account correction
- Account allowance
- Account transfer
- Cash advance
Each type of transactions will have a different effect on the front office accounting system. Each may be communicated to the front office through the use of a different type of voucher, which will help simplify eventual auditing procedures.
Cash Payments: Cash payments made at the front desk to reduce a guest’s net outstanding balance are posted as credits to the guest or non-guest account, thereby decreasing the balance of the account. The front office may use a cash voucher to support such transactions. When cash is paid for goods or services at a location other than the front desk, no entry will appear on the account folio. The account for this transaction is created, increased, settled and closed at the point-of-sale, thereby eliminating the need for front office documentation or posting.
Charge Purchase: Charge purchase represent deferred payment transactions. In a deferred payment transaction the guest receives goods and services from the hotel, but does not pay for them at the time they are provided. A charge purchase transaction (Debit) increases the outstanding balance of a folio. In non-automated and semi-automated properties the transactions in revenue centers are communicated to the front office for posting by means of account receivable vouchers.
Account Correction: An account correction transaction resolves a posting error on a folio. By definition an account correction is made on the same day the error is made, before the close of business. An account correction can either increase or decrease an account balance, depending on the error. A correction voucher is used to document an account correction transaction.
Account Allowance: Account allowance involves two types of transactions. One type of account allowance is as decrease in folio balance for such purpose as compensation for poor service or rebates for coupon discounts. Another type of account allowance corrects a posting error detected after the close of business. Such an error will be separately entered into accounting records of the appropriate revenue centers, thereby also correcting their accounting records. An account allowance is documented by the use of an allowance voucher which normally requires management approval.
Account Transfer: Account transfer involves two different accounts and then to have offsetting impacts on subsequent account balance. For example when one guest offers to pay a charge posted to another guest folio the charge will need to be transferred from the first account to the second account. A transfer voucher supports an account transfer. Am account transfer may also occur when a departing guest uses a credit card to settle his/her account. The guest outstanding balance is transferred from guest account to a non-guest account through the use of transfer voucher.
Cash advance/ Visitors Paid Out (VPO): Cash advances differ from other transactions in that they reflect cash flow out of the hotel, either directly to or on behalf of a guest. Cash advance transactions are similar to debit transactions and increase a folio balance. Cash advances are supported by cash advance vouchers (format). Cash disbursed by the hotel on behalf of the guest and charged to the guest’s account as a cash advance is typically called a paid-out. Such expenses are usually taxi charges, porter charges, emergency medical expenses, ticket confirmation charges, floral delivery etc. For example, a guest who orders a floral delivery, may request that the front desk agent accept the order and pay for the flowers. This payment for flowers is a cash advance on the guest’s behalf. The front office pays for the delivery on the assumption that the guest will reimburse the hotel. Hotel policy will dictate how cash advances are to be handled. Usually, prior confirmation needs to be taken from the guest before any payment is made on his behalf. These payments are made from the cash bank received at the beginning of the shift by the cashier. Paid outs are only made in local currency
Procedure for handling paid-outs:
- Confirm the name, room no. and identity of the guest
- Find out details for which the paid-out is being made
- Fill in details into the paid-out voucher. Every voucher is numbered to maintain control.
- Get voucher authorized by the lobby manager.
- The guest signs in acknowledgement.
- Make the payment in cash to the guest or service provider- taxi or florist, etc.
- Fill in the details in the paid-out column of the front office cashier’s report.
Points of Sale
- Points of sale are the physical locations at which goods or services are purchased.
- Any hotel department or area that collects revenues is a point of sale.
- Large hotels typically support many points of sale: restaurants, lounges, room service, dry cleaning, valet service, parking garage, telephone service, fitness centers, athletic facilities, spas, and retail shops.
- Some hotels offer guest-operated devices that function as self-service points of sale (in-room movie systems, Internet-access devices, in-room vending systems
- The volume of goods and services purchased at scattered points of sale within the hotel requires a complex internal accounting system.
- An automated point-of-sale (POS) system enables remote terminals at the point of purchase to communicate directly with the front office system.
- Automated POS systems significantly reduce the amount of time needed to post charges to guest folios, minimize the number of times transactional data must be handled, and virtually eliminate after-departure (late) charges.
- POS information includes transaction number, charge amount, name of POS outlet, guestroom number, name of the guest, and a brief description of the charge.
- To establish charge privileges, a guest may be required to present a valid payment card or a direct billing authorization at the time of registration; an automated system will allow credit to be established at the time a reservation record is created.
- Typically, the hotel obtains the number and expiration date of the guest’s payment card and electronically requests an amount guarantee from the card company.
- Once a line of credit has been approved, guests can make charge purchases at hotel points of sale.
- Guests who use cash to pay for accommodations are typically not extended charge privileges; these guests are called paid-in- advance or PIA guests.
- In an automated front office system, PIA accounts are usually set to a “no-post” status.
- In addition to guests, local businesses or residents may apply to the hotel for charge privileges.
- Front office staff must monitor guest and non-guest accounts to ensure they remain within acceptable credit limits.
- Guests using a payment card may be extended a line of credit equal to the floor limit authorized by the card company; guests and non-guests with other credit arrangements are subject to credit limitations (house limits) set by the front office.
- Accounts approaching their floor or house limit are called high-risk or high-balance accounts and must be carefully monitored by management.
- For high-risk accounts, front office managers may ask the payment card company to authorize additional credit, or request that guests make a partial payment.
- A cash bank is the amount of cash assigned to a cashier to handle the various transactions that occur during a work shift.
- The hotel may issue cash banks with a specific amount of money to each cashier.
- The bank limit is the starting amount the bank should have when it is issued at the start of the shift.
- Cashiers typically sign for their banks at the beginning of their shifts and are the only people with access to their particular bank. At the end of the shift, the cashier deposits all cash, checks, and other negotiable instruments into the hotel safe (or other designated location).
- After the deposit is made, the bank should be back to its original bank limit. In hotels that do not assign individual banks, cashiers usually pass the banks to the next shift after making their deposits and verifying the balance of the banks at the end of their shifts; the cashiers receiving the banks should also verify that the banks have the proper amount of cash in them.
- When a cashier makes a deposit, another employee should witness the deposit and both employees should sign a log.
Net Cash Receipts, Overages, Shortages, and Due Backs
Net cash receipts: Net cash receipts are the amount of cash, checks, and other negotiable items in the cashier’s drawer, minus the amount of the initial cash bank, plus any paid-outs.
Overages: An overage occurs when, after the initial bank is removed, the total of the cash, checks, gift certificates, and paid-outs is greater than the net cash receipts.
Shortages: A shortage occurs when the total of the contents of the cash drawer is less than the net cash receipts.
Due backs: A due back occurs when a cashier pays out more than he or she receives; in other words, there is not enough cash in the drawer to restore the initial bank.