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Hotel Industry Overview - August 2007 - Accounting Principles


"This document is not an official pronouncement of the law or the position of the Service and cannot be used, or cited, or relied upon as such."

Accounting Principles

The lodging industry was reportedly one of the first industries to develop “definitive standards to provide specific guidance to accountants and operators. The standards evolved because uniformity of layout and presentation were, and are, still not stressed under U.S.

Generally Accepted Accounting Principles (GAAP).” [3]; Those standards were and are contained in the Uniform System of Accounts for the Lodging Industry (USALI), which is published by the American Hotel and Motel Association. [4]

While the accounting profession may not have seen fit to develop GAAP standards specifically applicable to the lodging industry, the USALI has been widely adopted within the industry. Although there is no requirement that a lodging operator use the USALI, the degree of compliance with this time-tested, turnkey system is substantial. The primary reason for widespread adoption of the USALI has been comparability.  Lodging operators tend to use financial statement data generated by competitors as a benchmark against which to measure their own operations.  If comparability is lacking, then there are no benchmarks.

Additionally, while the system was developed for use within the United States, many hotel operators around the world have adopted the USALI. 

Financial statements prepared for external users, are based on GAAP.  In addition to other items commonly found in most financial statements, lodging industry financials are likely to report on such items as China, Glassware, Silver, Linen, and Uniforms (CGSLU), and the House Bank.

The USALI is a highly departmentalized system of accounting, and includes Departmental Statements of Income.  There are two main department classifications in a hotel: operating and overhead.  The operating (revenue-producing) departments include rooms, food and beverage, telecommunications, and similar departments.  The overhead departments include administrative and general, data processing, human resources, transportation, marketing, guest entertainment, energy costs, and property operation and maintenance.

The USALI itself provides for up to 30 departmental statements, which include, in addition to those already mentioned: telecommunications, garage and parking, golf shop, golf pro shop, guest laundry, health center, swimming pool, tennis, tennis pro shop, other operated departments, rentals and other income, human resources, information services, security, franchise fees, management fees, rent, property taxes and insurance, interest expense, depreciation and amortization, income taxes, house laundry, salaries and wages and payroll taxes and employee benefits.

The principal differences between a hotel’s transactions and internal control and those of other businesses are found in the revenue cycle.  Room revenue is the most important source of income to a hotel.  The front desk is the center of the hotel’s operation and the place where the guest ledger, which summarizes and accumulates all charges to guests using the hotel facilities, is maintained.  Some of the functions performed by front desk personnel are registering guests, recording room revenue, recording food and beverage and other guest charges, checking out guests, and settling guests’ bills.  There are numerous articles and books that further explain the hotel business.  For more information, refer to Montgomery’s Auditing by O’Reilly,Vincent M., et al., Twelfth Edition.  new York: Wiley, 1998.

Montgomery’s Auditing recommends the following substantive tests for room revenue for financial statement purposes:

  • Review reconciliations of rooms occupied per the front desk to the housekeeper’s daily  inspection report or the exception report 
  • Compare the room rate charged on the guest folio with that on the guest registration and room rack for a selected number of folios
  • Trace room charges to guest folios and compare with established rates
  • Trace cash receipts to the cashier’s report and the cash receipts journal                

Montgomery’s Auditing recommends the following for revenue deductions (allowances):

  • Determine that adjustments (credits) made to guests’ accounts in connection with overcharges, disputed charges or rate changes were properly approved
  • Review supporting documentation for propriety
  • Trace credit postings to individual guest folios

From a tax audit standpoint, the available descriptions of hotel operations would seem to suggest considerable opportunity for manipulation of both revenue and expenses.  Room rates vary considerably depending on a variety of factors - e.g., group rates versus individual rates, etc.  The occupancy rate would appear to be another area of potential concern. 

While these concerns may not be overly great in the case of publicly traded companies who have to undergo an audit in the post Sarbanes-Oxley atmosphere, there may be of considerable concern with non-publicly traded companies.

Additionally, one of the newest areas that is gaining significance in the industry is the barter transaction.   A barter transaction occurs when a property agrees to provide accommodation and/or other services in exchange for external services, for example advertising. While USALI recognizes barter transactions as executory contracts that do not need to be recorded in the financial statements until service is provided or received, it suggests that to provide more complete information for decision-making, the internal records reflect the transaction by recording an asset and a liability at the time the barter transaction is negotiated. The value assigned to this transaction should be a conservative average of the market rate for similar accommodations or services at the property, per the USALI.[5]

When services are provided by the property, revenues are recorded and charged to the barter liability. On the other side, the expense is offset against the barter asset account when the service is received. For external reporting purposes, USAL suggests that the asset and liability accounts be netted and reflected as a current asset or liability. This will result in revenues and expenses associated with the barter transaction being reported in different periods. [6]

Ratio analysis, in general, comprises the same types of ratios used in almost any industry.  However, there are a few industry specialized ratios peculiar to hotels and/or restaurants of which one should be aware.

  • Average Room Rate = Rooms Revenue divided by Paid Rooms Occupied. 
  • Average Food Check = Total Food Revenue divided by Number of Covers.  Covers refer to guests served in the food operation during the period. 

A key recent addition is RevPar, which stands for Revenue per Available Room.  It is calculated as either: Rooms Revenue divided by Rooms Available for Sale, or as Rooms Revenue divided by Rooms Available.  The USALI expresses a preference for the second computation because “[t]he purpose of the ratio is to determine whether the inventory of rooms is being managed optimally.  Therefore, the denominator should also include rooms out of order and temporary house use rooms.”[7]

The USALI also discusses a sample chart of accounts, which uses a twelve-digit numbering system, consisting of four clusters of three digits each.  The first three digits are the property number.  The second three digits are the revenue departments or cost centers.  The third three digits are the major accounts on the balance sheet or income statement and the final three digits are sub-accounts useful for analysis and control.  Obviously, this may vary considerably from taxpayer to taxpayer.

The descriptions contained in this guide only scratch the surface of standard practices within the hotel industry which are either unique to the hotel industry, or are uncommon in most other industries.  A partial listing of available publications is provided elsewhere within this guide should additional information be required.

[3] Popowich, Taylor, and Daria Sydor. "Uniform System of Accounts for the Lodging Industry: Are you up to Date?" The Journal of Hospitality Financial & Technology Professionals. Volume 12, Number 7 (October/November 1997).  28 June 2007

[4] Hotel Association of New York City, Inc. Uniform System of Accounts for the Lodging Industry. Ninth Revised Edition. Lansing, MI.  Educational Institue of the American Hotel & Lodging Association.  1996.

[5] Popowich, Taylor, and Daria Sydor. "Uniform System of Accounts for the Lodging Industry: Are you up   to Date?" The Journal of Hospitality Financial & Technology Professionals. Volume 12, Number 7 (October/November 1997).  28 June 2007

[6] Ibid.

[7] Ibid.

Chapter 4 | Table of Contents | Chapter 6

Page Last Reviewed or Updated: 24-Oct-2014