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Basic Financial Accounting Review 4259_Jagels_01.qxd 4/11/03 5:01 PM Page 1 CHAPTER 1 BASIC FINANCIAL ACCOUNTING REVIEW INTRODUCTION Every profit or nonprofit business en- transactions, to add, subtract, summa- tity requires a reliable internal system rize, and check for errors. The rapid of accountability. A business account- advancement of computer technology ing system provides this accountabil- has increased operating speed, data ity by recording all activities regard- storage, and reliability accompanied ing the creation of monetary inflows by a significant cost reduction. Inex- of revenue and monetary outflows pensive microcomputers and account- of expenses resulting from operating ing software programs have advanced activities. The accounting system to the point where all of the records provides the financial information posting, calculations, error checking, needed to evaluate the effectiveness and financial reports are provided of current and past operations. In ad- quickly by the computerized system. dition, the accounting system main- The efficiency and cost-effectiveness tains data required to present reports of supporting computer software al- showing the status of asset resources, lows management to maintain direct creditor liabilities, and ownership eq- personal control of the accounting uities of the business entity. system. In the past, much of the work re- To effectively understand con- quired to maintain an effective ac- cepts and analysis techniques dis- counting system required extensive cussed within this text, it is essential individual manual effort that was te- that the reader have a conceptual as dious, aggravating, and time consum- well as a practical understanding ing. Such systems relied on individ- of accounting fundamentals. This ual effort to continually record chapter reviews basic accounting 4259_Jagels_01.qxd 4/11/03 5:01 PM Page 2 2 CHAPTER 1 BASIC FINANCIAL ACCOUNTING REVIEW principles, concepts, conventions, and has taken an introductory accounting practices. This review should be of course or who has not received particular benefit to the reader who accounting training for some time. CHAPTER OBJECTIVES After studying this chapter and completing the assigned exercises and problems, the reader should be able to 1 Define and explain the accounting principles, concepts, and the concep- tual difference between the cash and accrual methods of accounting. 2 Explain the rules of debits and credits and their use as applied to double- entry accounting by increasing or decreasing an account balance of the five basic accounts; Assets, Liabilities, Ownership Equity, Sales Revenue, and Expenses. 3 Explain the basic balance sheet equation: Assets ϭ Liabilities ϩ Owner’s Equity. 4 Explain and demonstrate the difference between journalizing and posting of an accounting transaction. 5 Explain the income statement and its major elements as discussed and ap- plied to the hospitality industry. 6 Complete an unadjusted trial balance, balance sheet, and income state- ment. 7 Explain and demonstrate end-of-period adjusting entries required by the matching principle. 8 Demonstrate the use of four depreciation methods. 9 Complete an analysis to convert a business entity from cash to an accrual accounting basis. Financial accounting is concerned with providing information to users out- side of business that are in some way concerned or affected by the performance of the business; stockholders, creditors, lenders, governmental agencies, and other outside users. Hospitality management accounting is concerned with providing spe- cialized internal information to managers that are responsible for directing and controlling operations within the hospitality industry. Internal information is the basis for planning alternative short- or long-term courses of action and the de- cision as to which course of action is selected. Specific detail is provided as to how the selected course of action will be implemented. Managers direct the needed material resources and motivate the human resources needed to carry 4259_Jagels_01.qxd 4/11/03 5:01 PM Page 3 HOSPITALITY ACCOUNTING OVERVIEW 3 out a selected course of action. Managers control the implemented course of ac- tion to ensure the plan is being followed and, as necessary, modified to meet the objectives of the selected course of action. CAREERS IN HOSPITALITY ACCOUNTING For the student interested in accounting, there are a variety of career op- portunities in the hospitality industry. First, there is general accounting, which includes the recording and production of accounting information and/or spe- cialization in a particular area such as food service and beverage cost control. Second, larger organizations might offer careers in the design (or revision) and implementation of accounting systems. A larger organization might also offer careers in budgeting, tax accounting, and auditing that verifies accounting records and reports of individual properties in the chain. HOSPITALITY ACCOUNTING OVERVIEW Hospitality business operations, as well as others, are generally identified as having a number of different cyclical sales revenue cycles. First, there is the daily operating cycle that applies particularly to restaurant operations where daily sales revenue typically depends on meal periods. Second, there is a weekly cycle. On the one hand, business travelers normally use hotels, motels, and other hospitality operations during the week and generally provide little weekend hos- pitality business. On the other hand, local people most often frequent restau- rants on Friday through Sunday more than they do during the week. Third, there is a seasonal cycle that depends on vacationers to provide revenue for hospi- tality operations during vacation months. Fourth, a generalized business cycle will exist during a recession cycle and hospitality operations typically ex- perience a major decline in sales revenue. The various repetitive accounting cycles encountered in hospitality oper- ations create unique difficulties in forecasting revenue and operating costs. In particular, variable costs (e.g., cost of sales and labor costs) require unique plan- ning and procedures that assist in budget forecasting. Since hospitality opera- tions are people-oriented and people-driven, it is more difficult to effectively au- tomate and control hospitality costs than it is in other nonhospitality business sectors. Unfortunately, most accounting textbooks and generalized accounting courses emphasize accounting systems using procedures and applications that 4259_Jagels_01.qxd 4/11/03 5:01 PM Page 4 4 CHAPTER 1 BASIC FINANCIAL ACCOUNTING REVIEW are applicable to services, retailing, and manufacturing businesses. These types of businesses do not normally require the use of the unique accounting proce- dures and techniques required by hospitality operations. In manufacturing op- erations, all costs are generally assigned to products or product lines and iden- tified as direct costs and indirect costs. Direct costs include all materials and labor costs that are traceable directly to the product manufactured. Indirect costs generally refer to manufacturing or factory overhead, and include such items as factory supporting costs such as administrative salaries, wages and mis- cellaneous overhead, utilities, interest, taxes, and depreciation. The basic nature of indirect costs presents difficulties isolating specific costs since they are not directly traceable to a particular product. Portions of supporting indirect costs are assigned by allocation techniques to each product or product line. However, a hospitality operation tends to be highly departmentalized with separate operating divisions that provide rooms, food, beverage, banquet, and gift shop services. A hospitality accounting system must allow an independent evaluation of each operating department and its operating divisions. Costs di- rectly traceable to a department or division are identified as direct costs. Typi- cally, the major direct costs include cost of sales (cost of goods sold), salary and wage labor, and specific operating supplies. After direct costs are determined, they are deducted from revenue to isolate contributory income, which repre- sents the department’s or division’s contribution to support undistributed indi- rect costs of the whole operation. Indirect costs are those costs not easily traceable to a department or divi- sion. Generally, no attempt is made at this stage of the evaluation to allocate in- direct costs to the department or divisions. Managers review operating results to ensure that contributory income from all departments or divisions is suffi- cient to cover total indirect costs for the overall hospitality operation and pro- vide excess funds to meet the desired level of profit. GENERAL FINANCIAL ACCOUNTING TERMS The objective of this text is to provide managers in the hospitality industry with a working knowledge of how an accounting system develops, maintains, and provides financial information. Managerial analysis is enhanced with an un- derstanding of the information provided by an accounting system. Without man- agement’s understanding of the information being provided, management ef- fectiveness will be greatly reduced. Financial accounting is a common language developed by accountants over time to define the principles, concepts, procedures, and broad rules necessary for management’s use in a viable accounting system for making decisions and main- taining an efficient, effective, and profitable business. An accounting system shows detailed
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