Table of Contents
Q.1. What do you understand by Hotel Departmental Accounting? Explain any five advantages.
Departmental Accounting is basically keeping the separate book of accounts of individual department.If a business consists of several independent activities, or divided in to several department for carrying out its functions, its management is usually interested in finding out the working results of each departments to ascertain their relative efficiencies.This can be made possible only if departmental accounts are prepared. Departmental accounts are of great help and assistance to the management as the information for controlling the business more intelligently and effectively.
Advantages of departmental accounting:
1 Evaluation of performance: The performance of each department can be evaluated separately based on trading results. An endeavour may be made to push up sales of that department which is earning maximum profit.
2 Growth potential of each department: The growth potential of a department as compared to others can be evaluated.
3 Justification of capital outlay: It helps the management to determine justification of capital outlay in each department.
4 Judgement of efficiency: It helps to calculate stock turnover ratio of each department separately thus the efficiency of each department can be revealed.
5 Planning and control: Availability of separate cost and profit figures for each department facilitates better control. Thus, effective planning control can be achieved on
the basis of departmental accounting information.
Q.2. Write short notes on any two:
(a) Sales mix
A sales mix is the variety of products sold by a company. A company’s sales mix canalso be considered the ratio of sales for each product compared with the overall sales
volume of all products.Sales mix is analysed by management continually because a company’s sales mix directly affects the company’s breakeven point and cost volume profit analysis. This makes sense because businesses generally carry a variety of products in their inventory.Some of these products are low cost items and others are high cost products.Depending on the sales mix or the ratio of low cost products to high cost products carried by the business, the breakeven point might be higher or lower.
Example,
For instance, a bicycle retailer might carry five $500 bicycles, two $1,000 bicycles, and one $5,000 bicycle. This is the retailer’s sales or product mix. The company has a smaller investment in the $500 bicycles and will most likely receive a smaller profit on the sale of these bikes. The $5,000 bicycle requires a higher investment and will also return a higher profit percentage than the lower cost bicycles. The breakeven point will be based on the current sales and costs of the bikes.As you can see, management must decide whether to create a sales mix that is heavy in high cost products or heavy in low cost products. Planning a sales mix is a strategy decision that management must make based on economic and market conditions.
(b) Business entity concept
The business entity concept states that the transactions associated with a business must be separately recorded from those of its owners or other businesses. Doing so requires the use of separate accounting records for the organization that completely exclude the assets and liabilities of any other entity or the owner. Without this concept, the records of multiple entities would be intermingled, making it quite difficult to discern the financial or taxable results of a single business.
Here are several examples of the business entity concept:
A business issues a $1,000 distribution to its sole shareholder. This is a reduction in equity in the records of the business, and $1,000 of taxable income to the shareholder.
The owner of a company personally acquires an office building, and rents space in it to his company at $5,000 per month. This rent expenditure is a valid expense
to the company, and is taxable income to the owner.
The owner of a business loans $100,000 to his company. This is recorded by the company as a liability, and by the owner as a loan receivable.
There are a number of reasons for the business entity concept, including:
-Each business entity is taxed separately
-It is needed to calculate the financial performance and financial position of anentity
-It is needed when an organization is liquidated, to determine the amounts of payouts to the various owners
-It is needed from a liability perspective, to ascertain the assets available in the event of a legal judgment against a business entity
-It is not possible to audit the records of a business if the records have been combined with those of other entities and/or individuals
(c) Debentures
A debenture is a type of debt instrument that is not secured by physical assets or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer. Both corporations and governments frequently issue this type of bond to secure capital. Like other types of bonds, debentures are documented in an indenture.A medium or long term debt format that large companies use to borrow money.A debenture is one of the most typical forms of long term loans that a company can take.It is normally a loan that should be repaid on a specific date, but some debentures are irredeemable securities (sometimes referred to as perpetual debentures).
The majority of debentures come with a fixed interest rate. This interest must be paid before dividends are paid to shareholders.
(d) Current assets
A current asset is any asset which can reasonably be expected to be sold, consumed, or exhausted through the normal operations of a business within the current fiscal year
or operating cycle (whichever period is longer). Typical current assets include cash, cash equivalents, short-term investments (marketable securities), accounts receivable, stock inventory, supplies, and the portion of prepaid liabilities, sometimes referred to as prepaid expenses, which will be paid within a year.
(e) Direct and indirect cost
Direct Costs
Direct costs can be defined as costs which can be accurately traced to a cost object with little effort. Cost object may be a product, a department, a project, etc. Direct costs
typically benefit a single cost object therefore the classification of any cost either as direct or indirect is done by taking the cost object into perspective. A particular cost may be direct cost for one cost object but indirect cost for another cost object.Most direct costs are variable but this may not always be the case. For example, the
salary of a supervisor for a month who has only supervised the construction of a single building is a direct fixed cost incurred on the building.
Examples: Cost of gravel, sand, cement and wages incurred on production of concrete.
Indirect Costs
Costs which cannot be accurately attributed to specific cost objects are called indirect costs. These typically benefit multiple cost objects and it is impracticable to accurately trace them to individual products, activities or departments etc.
Examples: Cost of depreciation, insurance, power, salaries of supervisors incurred in a concrete plant.
Q.3. What do you understand by Internal Control? Explain its characteristics.
The control is a continuous process. It is a part of routine in all types of organisations whether small or big. The word ‘control’ itself is disliked by one and all, nobody likes to be controlled by others no matter how small or big employee he maybe.The whole system of control, financial and otherwise, established by the management in order to carry on the business of the enterprises in an orderly and efficient manner, ensure adherence to management policies, safe-guard the assets and secure as far as possible the completeness and accuracy of the records.
Essential Features Of Internal Control:
1. Experienced, Qualified and Trustworthy Personnel: The personnel should be well qualified, experienced and trustworthy and this helps in providing better services than competitors. This also ensures in having a better internal control on pilferages.
2. Division of Duty: The duties are segregated to improve the efficiency, quality and for controlling the pilferage.
3. Leadership: Board of Directors, General Manager and other managers and supervisors must lead the person by communicating the policies of the hotel to one and all and encourage the personnel to have the best output and control.
4. Organisational Structure: The chain of hotels or hotel as the case maybe must have a clear organisational structure and the personnel must know from whom to
take orders and whom to report.
5. Sound Practice: These are policy measures generally set up and implemented by the board of directors and other senior executives in order to create an environment which facilitates internal control.
6. Authorised Personnel: The management must authorise clearly the personnel for taking certain decision. For example: a person should be authorised to extend discount, cancel a bill, extend complimentary food/room, etc.
7. Records: The records must be maintained to ensure internal control. The records like guest registration cards, bills, K.O.T’s, control sheets, etc. Are not only maintained, checked, verified, but are also stored for future references.
8. Manual Procedures: Each job should be reduced to writing. Log books must be maintained in each department. The manual procedures should list the details of each position including how and when to perform each task.
9. Control: Control includes security services and measures for protecting assets,stores, guest’s valuables, etc. The security services, as far as possible, must be hired from professionals.
10. Budget: The Budgets like short term, long term, specific budgets, etc. Must be made for sale, cost, production etc. The budgets must be achievable but not
achievable so easily. The goals of the hotel must be clearly mentioned and the goals must be made not only for sale, cost etc. but must also be made for controlling pilferages.
11. Reports: For each job reports, must be made and circulated among the executives of the hotel for information and control.
12. Independent Checks: The personnel responsible for performing the jobs should not be asked for the internal checks but internal checks must be performed by different personnel either from the permanent personnel employed in the hotel orsometimes maybe hired from outside
Q.4. What is meant by Uniform System of Hotel Accounts? Explain its advantages.
Uniform account is used by several hotels / restaurants of the same accounting (costing and sale) principal and / or practices. Uniform accounting is thus not a separate technique or method. It simply denotes a situation in which number of hotels /restaurants may use the same accounting (costing and sales) principal in such a way as to produce sales, valuable conclusions can be drawn and one hotel can be compared to others. The extent of application of uniform accounting principles depends on the circumstance of each case. Many schemes of uniforms accounting system have been introduced in the last century and a few of them are still in use. The most successful uniform system of accounting was the one introduced by the Federation of Master Printers in 1911 and the most successful system in hotel industry was introduced in March 1926 by the Hotel Association of New York City and in September.1926 the American Hotel and Motel Association of the North America adopted the same and recommended its members to adopt it.
Advantages of Uniform System of Hotel Accounts:
1. Transfer: The staff can be transferred from one hotel to other very easily as due to same accounting system it does not take long for the staff to adjust to the new hotel.
2. Comparison: Since hotels are following the same accounting system so they can be compared amongst each other. One can find out the causes for higher cost or lower
sales and take corrective measure.
3. Buying Shares: General public or financial institutions can compare the hotels profitability and its helps them in deciding the price. They should pay to buy the equity
take over or to pay as a loan.
4. Lease or Rent: It is easy to decide on the rent or a lease for the hotels/restaurants.Both tenants and owner can study and compare the expenditure and income of various hotels/ restaurants and this will help to decide on the rental value or lease money for the hotel/restaurant on yearly or season basic.
OR Write short notes:
(a) Gross Profit Method
The gross profit method estimates the amount of ending inventory in a reporting period. This is of use in the following situations:
For interim periods between physical inventory counts.
When inventory was destroyed and you need to back into the ending inventory balance for the purpose of filing a claim for insurance reimbursement.
Follow these steps to estimate ending inventory using the gross profit method:
1. Add together the cost of beginning inventory and the cost of purchases during the period to arrive at the cost of goods available for sale.
2. Multiply (1 – expected gross profit %) by sales during the period to arrive at the estimated cost of goods sold.
3. Subtract the estimated cost of goods sold (step #2) from the cost of goods available for sale (step #1) to arrive at the ending inventory.In addition, it is useful to compare the resulting cost of goods sold as a percentage of sales to the recent trend line for the same percentage, to see if the outcome is reasonable.The gross profit method is not an acceptable method for determining the year-end inventory balance, since it only estimates what the ending inventory balance may be. It is not sufficiently precise to be reliable for audited financial statements.
Gross Profit Method Example
Amalgamated Scientific Corporation (ASC) is calculating its month-end inventory for March. Its beginning inventory was $175,000 and its purchases during the month were $225,000. Thus, its cost of goods available for sale are: $175,000 beginning inventory + $225,000 purchases = $400,000 cost of goods available for sale ASC’s gross margin percentage for all of the past 12 months was 35%, which is considered a reliable long-term margin. Its sales during March were $500,000. Thus, its estimated cost of goods sold is:(1 – 35%) x $500,000 = $325,000 cost of goods sold.By subtracting the estimated cost of goods sold from the cost of goods available for sale,ASC arrives at an estimated ending inventory balance of $75,000.
(b) Basis of Allocation
There are many common costs such as rent, electricity etc. which are associated with more than one department. In case of departmental accounting we need to allocate
these cost to all related department on various basis. These basis used for allocating such costs are Basis of Allocation.Different basis of allocation are:
The above-mentioned basis of allocation are some of the basis recommended but a management may adopt altogether a different base for allocation of indirect cost to different department.
(c) Income Statement
An income statement or profit and loss account (also referred to as a profit and loss statement (P&L), statement of profit or loss, revenue statement, statement of financial performance, earnings statement, operating statement, or statement of operations) is one of the financial statements of a company and shows the company’s revenues and expenses during a particular period. It indicates how the revenues (money received from the sale of products and services before expenses are taken out, also known as the “top line”) are transformed into the net income (the result after all revenues and expenses have been accounted for, also known as “net profit” or the “bottom line”). It displays the revenues recognized for a specific period, and the cost and expenses charged against these revenues, including write offs (e.g., depreciation and amortization of various assets) and taxes. The purpose of the income statement is to show managers and investors whether the company made or lost money during the period being reported.One important thing to remember about an income statement is that it represents a period of time like the cash flow statement. This contrasts with the balance sheet, which represents a single moment in time.
Q.5. Differentiate between the following (any two):
a) Income statement and Balance sheet
(b) Gross profit and Net profit
| Gross Profit | Net Profit |
| Gross profit is the difference between a company’s total revenues or sales of its products and services, and the direct costs associated with producing and selling a company’s products and services, which is defined as the cost of goods or cost of sales. |
Net profit, or net income, is a company’s total earnings after subtracting all its expenses from its total sales and other income for a specific period of time. Typically, net profit is measured on a quarterly or annual basis. |
| Gross profit is determined by taking a company’s revenues, or total sales, and subtracting the cost of goods, known as COGS, for a specific period of time |
Net profit is determined by subtracting a company’s COGS; selling, general and administrative expenses, depreciation costs; and taxes from its revenues and any other income. |
(c) Revenue and Reserves
Revenue is the amount of money that a company receives during a specific period,including discounts and deductions for returned merchandise. It is the “top line” or “gross income” figure from which costs are subtracted to determine net income.Reserve is an appropriation of profit. Any company must have financial reserves to meet its sudden financial requirements, for growth and development, to expand the business in other areas, etc. Reserves in any company can be broadly categorized into two based on the kind of profit it appropriates. One category is capital reserve, and the other is revenue reserve. Reserves must be kept aside to meet requirements.
(d) Revenue producing centres and Non-revenue producing centres
Revenue Centres
Sales or marketing departments are the most common forms of revenue centers in small or large businesses. The management team is responsible for selling products or services that the company produces at a specific cost. The team sets a selling price based on production costs plus a margin for profit. Its objective is to meet or exceed revenue targets while maintaining agreed profit margins.
Expense Centres
Expense centers are those parts of the company that do not contribute directly to profit. They fall into two broad categories: cost centers and discretionary expense centers. Cost centers, such as manufacturing units or service delivery units, are responsible for producing a certain level of output at an agreed cost. Discretionary expense centers provide internal services, such as finance, administration or human resources.
Q.6. From the following information, prepare Income Statement under Uniform
System of Hotel Accounts:
Income tax @ 40% p.a. on net income.
Q.7. Under mentioned is the financial data of a hotel. Prepare Room Department
Income Schedule (Under Uniform System of Hotel Accounts).
| Sales / Revenue: | |
| Transient – Regular Transient – Group Permanent Extra Revenue Salary & Wages Insurance – Incentives Commission Linen expenses Dry cleaning Allowances (Rooms) Contract cleaning Operating supplies Laundry Other expenses |
5,00,000/- 6,00,000/- 7,00,000/- 50,000/- 2,00,000/- 50,000/- 10,000/- 20,000/- 20,000/- 15,000/- 75,000/- 80,000/- 20,000/- 70,000/- |
Q.8. Prepare an Income Statement of Food & Beverage Department from the data given below:
OR From the information given below, prepare Departmental Income Statement of M/s. Arjun Hotel Ltd:
| Sales: Restaurant Rooms Others |
7,00,000/- 5,00,000/- 3,00,000/- |
| Cost of Sales: Restaurant Rooms Others |
3,00,000/- 1,00,000/- 50,000/- |
| Wages & Salaries: Restaurant Rooms Others |
1,50,000/- 1,00,000/- 25,000/- |
| Repairs & Maintenance: Restaurant Rooms Others |
50,000/- 25,000/- 10,000/- |
| Gas & Electricity: Rent & Taxes Depreciation Advertising Insurance |
25,000/- 25,000/- 15,000/- 10,000/- 25,000/- |
Unallocated expenses are to be apportioned in the ratio of 40%, 50% and 10%
Q.9. From the following data, prepare a Balance Sheet of M/s. XYZ Co. Ltd. for the period ending 31st March 2013:
| Capital | 2,50,000/- | Drawings | 30,000/- |
| Net profit | 25,000/- | Creditors | 20,000/- |
| Bank | 40,000/- | Debtors | 25,000/- |
| Building | 2,00,000/- | Furniture | 40,000/- |
| Bills payable | 20,000/- | Cash | 5,000/- |
| Closing stock | 10,000/- | Bills receivable | 5,000/- |
| Tools & equipment | 20,000/- | Bad debts | 1,000/- |
| Provision for doubtful debts |
2,000/- | Bank loan | 50,000/- |
| Tax payable | 7,000/- |
Some More Important Things to Know
Account Form
The account form of the balance sheet provides information in an essentially horizontal format. The account form has two columns, set side by side. The left column lists the company’s assets. The final line on the left side of the sheet provides the total value of all assets. The column on the right lists both liabilities and equity, with liabilities coming first. The final line on the right provides the total combined value of liabilities and equity.
Report Form
The report form of the balance sheet provides information in a vertical format -essentially one column that goes the full width of the page. The report form starts with assets, providing a total value at the end of the assets section. It then lists liabilities and finishes with equity, with the final line of the report providing the total combined value of liabilities and equity.
The following schedules are accepting by a group of restaurants to have uniformity in the accounting system. These schedules are as follow:
| D1 FOOD SALE |
| D2 BEVERAGE SALE |
| D3 OTHER INCOME |
| D4 SALARY AND WAGES |
| D5 EMPLOYEE’S BENEFITS |
| D6 DIRECT OPERATIONAL EXPENSES |
| D7 MUSIC AND ENTERTAINMENT |
| D8 MARKETING EXPENSES |
| D9 ENERGY EXPENSE |
| D10 ADMINISTRATIVE AND GENERAL EXPENSES |
| D11 REPAIRS AND MAINTENANCE |
| D12 RENT AND RATES |
| D13 OTHER EXPENSES |
| D14 DEPRECIATIONS |
| D15 INTEREST |
| D16 INCOME TAX |
Major Types of Frauds in Hotels:
The internal control system is not only designed to prevent and detect fraud, but also to prevent and detect error which is usually more common than fraud. Though it is very difficult to list down all kinds of fraud, in fact every moment somewhere in the world, a new type of fraud takes place.
Some of the common frauds are:
1. Failure to make K.O.T.
2. Failure to make Check.
3. Failure to record sales in Sales Summary Sheet.
4. Under recording to sale
5. Picking up of food without proper check
6. Collecting payment from guest without check
7. Charging incorrect room rent
8. Selling room without registration
9. Payment of bill twice
10. Receiving a bill without goods
11. Receiving bills twice for one supply
12. Receiving goods and bill without any purchase order
13. Allowance or discount allowed without proper authorization
14. Ghost pay rolls
15. Full payment made for substandard goods received
16. Stealing hotels inventory and assets