FINACIAL BUSINESS OPERATIONS

IN

HOTEL INDUSTRY

Submitted by

Mr. KUSAM VIJAYKUMAR REDDY

Registration No: T05D18006100012

In partial fulfillment of the requirement for the award of the degree

Of

MASTER OF BUSINESS ADMINISTRATION

IN

HOSPITALITY MANAGEMENT AND CATERING SCIENCE

Under the Guidance of

Prof.K.Shanthi, MBA, M.Phil.

Department of Management Studies,

Chennai’s Amirta International Institute of Hotel Management,
Chennai
May 2019

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 BONAFIDE CERTIFICATE

Certified that the Project report titled FINANCIAL BUSINESS OPERTIONS IN HOTEL INDUSTRY
Is the Bonafide work of Mr. / Ms. KUSAM VIJAYKUMAR REDDY Reg No: T05D18006100012
Who carried out the work under my supervision. Certified further that to the best of my knowledge
the work reported herein does not form part of any other project report or dissertation on the basis
Of which a degree or award was conferred on an earlier occasion on this or any other
University/Institution.

Signature of Guide

Name and Official Address of the Guide

Place:
Date:

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 STUDENTS’ DECLARATION

I, Mr.KUSAM VIJAYKUMAR REDDY hear by declare that Project Work Titled ACCOUNTS PAYABLE
AND RECEIVEBLE MANAGEMENT, is the original work done by me and submitted to the Chennai’s
Amirta International Institute of Hotel Management (Annamalai Univercity) in partial fulfillment of
requirements for the award of Master of Business Administration in Hospitality Management and Catering
Science. This is a record of original work done by me under the supervision of Dr/ Prof. VENKTRAMAN
of Chennai’s Amirta International Institute of Hotel Management, Chennai

Register No:
Date: Signature of the Student

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 Acknowledgement

First and foremost, I would like to state my gratefulness to Almighty Allah for enabling me to complete
this report in due time.

I would like to express my sincere gratitude to my internship faculty Prof.K.Shanthi, Senior

Lecturer,Chennais amrita international institute of hotel management, Annamalai University for
providing me with detailed feedback and advice on this report. He gave me suggestions in order to make
this study as informative and useful as possible.

I would also like to express my utmost appreciation to my Finance controller Mr. Sijo john, Head of
Finance and Accounts; reporting supervisor Mr.Mahesha,Sr Executive(Finance & Accounts) and
Fairfield by marriott, Executive (Finance & Accounts) for giving me an in-depth knowledge about the
department duty on managing accounts receivable and payable workflow the company is following as a
whole. I would also like to thank all the other officials from circulation, advertisement and collection
departments for providing the necessary information about the organization. Their guidance and co-
operation helped me to get a better understanding of the tasks performed at the organization.

I have also thoroughly enjoyed working on the internship report and hope the report is appreciative.

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UNIT - 1: INTRODUCTION
1.0 Industry Profile ....................................................................................................8
1.1 Hospitality and Tourism Industry. ....................................................................... 8
1.2 Current Status in the Industry. ............................................................................. 8
1.3 Current Trends in Hospitality Industry. ............................................................... 9
1.4 Working in the Hospitality Industry. ................................................................. 11
1.5 Company Profile ................................................................................................ 11
1.6 Company History. .............................................................................................. 12
UNIT – 2 HISTORY OF FINANCE
2.1 Introduction to finance……………………………………………………………17
2.2 Financial services………………………………………………………………....17
2.3 Areas of finance………………………………………………………………..…18
2.4 Corporate finance……………………………………………………………..…..20
2.5 Capital………………………………………………………………………...…...21
2.6 Public finance………………………………………………………………...…...22
2.7 Financial theory…………………………………………………………………...23
2.8 Professional qualifications………………………………………………………...24
UNIT-3 ACCOUNTS PAYABLE
3.1 Accounts payable process………………………………………………………….26
3.2 Related to expenses or asset………………………………………………………..29
3.3 End of the period cot-off…………………………………………………………...30
3.4 Accruing expenses and liabilities……………………………………………….….30
3.5 Adding general ledger accounts……………………………………………………31
3.6 Invoice credit terms………………………………………………………………...31
3.7 Others………………………………………………………………………………32
3.8 General ledger account……………………………………………………………..33
UNIT-4 ACCOUNTS RECEIVABLE & BADDEBTS EXPENSES
4.1 Accounts receivable………………………………………………………………..35
4.2 Baddebts expenses…………………………………………………………………35
4.3 Recording services provided on credit…………………………………………….35
4.4 Recording sales of goods on credit………………………………………………..36
4.5 Credit terms with discount…………………………………………………….......36

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 4.6 Credit risk………………………………………………………………………....37
4.7 Allowances method for reporting credit losses………………………...…………38
4.8 Allowences of doubtfull accounts and baddebts expenses………………….……38
4.9 Account under the allowance method…………………………………………….40
UNIT-5 INCOME AUDIT
5.1 Checklist for revenue audit…………………………………………………….....45
5.2 Difference between modified vs accrual accounting …………………….……....46
5.3 Business operations…………………………………………………………….....46
5.4 How to expenses ordering checks …………….………………………………….47
5.5 The penalties for creating false W-2……………………………………………...47
5.6 Basic book-keeping for the self-employed………………………………………..48
5.7 How to file payrole taxes………………………………………………………….48
5.8 Reimbursement count as income………………………………………………….49
5.9 Petty cash audit testing procedures………………………………………………..49
UNIT-6 HOTEL STORE AND PURCHASE
6.1 Functions of store and purchase……………………………………………….….58
6.2 Portion control for store and purchase……………………………………………58
6.3 Methods of monitoring portion…………………………………………………...59
6.4 Aids to portion control……………………………………………………………59
6.5 Losses in preparation……………………………………………………………...60
6.6 The effects of irregular administered portion control in store and purchase……..60
6.7 Purchasing………………………………………………………………………...62
6.8 Cycle of control in store and purchase……………………………………………62
6.9 Inventory control in store and purchase…………………………………………..64
6.9.1 The steps of the procurement cycle……………………………………………….65
6.9.2 Purchase order process steps……………………………………………………...66
6.9.4 What is the purchase order process……………………………………………….69
6.9.5 Basic inventory procedures……………………………………………………….71
6.9.6 Physical inventory form………………………………………………………......72
6.9.7 Pricing and costing for physical inventory………………………………………..78
6.9.8 Inventory tornover………………………………………………………………...79

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 UNIT-1
INTRODUCTION

1.0 Industry Profile

1.1 HOSPITALITY AND TOURISM INDUSTRY

Travel is often considered everyone’s favorite pastime. Thus, it is no wonder that

many consider the hospitality industry to be one of the world’s biggest industries. Some could
say the hospitality industry makes the world go round. Perhaps, that’s a bit of an exaggeration,
but it cannot be denied that the hospitality industry plays a critical role in world business, travel
and history. The hospitality industry is a service industry that has encompasses many different
branches of business including lodging, restaurants, cruises, theme parks and others segments
related to tourism. Many of the different branches are interrelated and directly influence each
other. The success or failure of one branch directly influences the success or failure of another.
The term Hospitality means the cheerful
welcoming of people, who may be known or may be strangers. From the beginning, hospitality
has been an important element in enriching experiences of guests through its consistent service
quality. They further elaborate that it includes hotels, resorts, restaurants, houseboats, catering
establishments, bed and breakfast outlets, casinos, clubs, lounges and bars.

1.2 CURRENT STATUS OF THE INDUSTRY

The Indian hotel industry is a highly divided one, with a large number of small and unorganized
players accounting for the major portion. Some of the main stakeholders in the organized
segment include Indian Hotel Company (Taj group of hotels, The East India Company (Oberoi
group of hotels), the ITC Welcomgroup Hotels, the Leela group of hotels (Hotel Leela Venture
Ltd).
There is high seasonality in the Indian hospitality
industry, with the demand peaking during the months of October to April. The monsoon period
is generally the off-season. It was observed that Indian hoteliers made most of their money in
the December and March quarters. However, one can see this trend changing in the past few
years. To boost occupancy during the lean months and thereby generate revenue, hotels have
introduced various offerings, such as targeting the MICE (Meetings, Incentives, Conferences
and Exhibitions/Expositions) segment and offering them attractive packages.

1.3 CURRENT TRENDS IN HOSPITALITY INDUSTRY

Contemporary needs, demands and desires of a tourists customers

(increased need for security and preservation of health; emphasis on ecology and healthy food;
pure nature stay; growing demand for adventure activities and excitement; convention facilities
and incentive offerings; visits to towns, big sports, cultural, religious, business events; new
travel motivation) have led to the emergence of new trends in hospitality offering design.
Current hospitality trends include:

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 1.4 Wellness and spa hotels

Release from the stress and desire to improve the quality of life has led to the emergence of
wellness and spa hotels. Business philosophy of wellness and spa hotels include face and body
care, health promotion with various wellness and spa methods, mental training and special
wellness diet. Some counties with developed tourism are developing wellness and spa tourism,
while some tourist destinations are gradually being profiled as wellness and spa destinations.

1.5 Boutique hotels

Boutique hotel is a term lately heard very often in demands of the world famous jetsetters and
tourist with high purchasing power. Typical boutique hotels include originally decorated
interior, specially designed rooms and suites furnished with a lot of style and detail, exclusive
lounge bar, excellent range of food and beverages, and hotel capacity is between 10 to 15
rooms. Due to their succession the market, some well-known international hotel chains have
also developed boutique hotels under its brand (W Hotels, Small Luxury Hotels of the World).
‘Boutique hotel does not have to be rebuilt, it does not have to be a new building, it can be
converted old buildings, castles, historic buildings, monasteries, villas or larger old farm
houses. Its location may not be a fashionable tourist destination. This type of hotel may be at
the seaside, mountain, and lake or in the countryside. It should only make profits as other types
of hotels, since invested funds should be returned and enriched.

1.6 All-inclusive hotels

All-inclusive hotels can be found in Mediterranean countries and exotic tourist destinations.
Hotels with all-inclusive service are often chosen by families with children and tourists who
will spend most of their time in the hotel complex, either at the beach or by the hotel pool.
Modern all-inclusive service includes rich buffet breakfast, lunch and dinner, afternoon and
late night snack, day and evening entertainment for children and adults, spots facilities (tennis,
football, basketball, handball, volleyball...).

1.3.4 Hotel animation

In recent years, animation has become an important component of the hotel offers aiming to
fill guests’ free time. Every serious hotel resort, if wanting to meet modern demands and needs
of the guest, pays special attention to this important segment of drawing up a variety of
activities for all age groups.
Major role in the realization of entertainment, sports and recreational facilities have hotel
animators. ‘Animators create a special atmosphere among the guests with their activities.
Depending on the structure of guests and the hotel category, animators are mostly taking care
of guests by organizing their free time, encouraging them to do various activities for recreation,
entertainment and relaxation.

1.3.5. Online search and booking

Modern consumers are increasingly facing the Internet concepts such as online search and
booking or e-payments as a part of everyday life. Hoteliers and restaurateurs who have adapted
to these trends very quickly show very good results. Websites presenting hotels and restaurants
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to guests are becoming richer, have more contents and offer the option of an online search and
booking service. Thanks to rich web pages and sophisticated booking systems, hotels and
restaurants successfully promote their services and destinations where they are located.
Hospitality is a specific economic activity which, except for basic service of food and
beverages, offers a variety of social, cultural and health services in order to meet desires and
needs of customers. New needs, demands and desires of customers have led to the emergence
of new trends in hospitality offerings design. Wellness and spa hotels, boutique hotels, all

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Inclusive hotels, slow food restaurants, and wine and lounge bars are only some of the main
trends and successful hospitality managers will create politics of development in accordance
with new requirements and the needs of the global market.

1.7 Working in the Hospitality Industry

As the hospitality industry includes many types of businesses, and within each business, a wide
spectrum of positions with varying skills, it is not an overstatement to say there is something
for everyone. The industry is characterized by a large number of employees and attracts
diversity of ages, genders, cultures and education levels. Entry level positions usually require
no formal education, while professional positions typically will require a college degree.
As with many industries, the hospitality industry is vulnerable to downturns in the economy,
especially as much of the industry is driven by disposable income. With that being said, the
hospitality industry is one of the oldest in the world, and one that continues to grow, innovate
and avail new opportunities.

1.8 1.5. Company Profile

Fairfield Inn & Suites

Industry Hospitality, tourism

Founded 1987

Number of locations 979 hotels (December 31, 2018)[1]

Area served Worldwide

Key people Liam Brown

Parent Marriott International

Website fairfield.marriott.com

Fairfield by Marriott is a low-cost, economy chain of hotels that are franchised by Marriott
International. The properties are geared towards guests requiring a place to sleep with fewer
amenities, thus allowing Marriott to offer lower prices than would otherwise be possible. This

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Is accomplished via cost-saving measures, such as consistent building architecture and bedding,
and the omission of a full-service restaurant. However, a complimentary hot breakfast is
included. As of December 31, 2018, it has 979 hotels with 94,288 rooms.

1.9 Company History

The Marriott chain began with two motels in the 1950s. The first opened as a Quality
Inn airport motel near Washington D.C. and another motel nearby, the Twin Bridges, a few
years later. With the opening of the second motel, Marriott was born as a brand name. The
Twin Bridges property was demolished in 1990, but the Key Bridge property still operates,
but as a full-service hotel.
In 1967, Marriott opened its first resort hotel, Camelback Inn, in Arizona, USA. Marriott
Hotels & Resorts expanded outside of the United States for the first time in 1969 with the
opening of the Marriott in Acapulco, Mexico.
By 1975, Marriott Hotels & Resorts had expanded to Europe, with the Amsterdam Marriott
hotel opening that year.
In 1976, Marriott opened two Great America theme parks but sold to Six Flags in 1984.
In these first several decades, Marriott International owned and managed many of the hotels
within its portfolio. In 1993, the company decided to spin off the real estate ownership
operations as a new company, Host Marriott, while retaining hotel management
Services under the Marriott International company name.
By 1999, there were over 360 Marriott Hotels & Resorts in 47 countries, and in 2012 Marriott
Hotels & Resorts celebrated the opening of the 500th Marriott Hotels & Resorts property, the
Pune Marriott Hotel & Convention Centre, in Pune, India. In April 2014, Marriott Hotels &
Resorts acquired The Protea Hotel Group in South Africa, rebranding the Protea Hotels name
to Protea Hotels by Marriott.

1.10 Vision

Marriott International's Vision is "To be the World's Favorite Travel Company."

To help us achieve our Vision, we've developed a 4-part strategy. This strategy focuses
on How We Win with our customers worldwide.
Our Purpose to "Open Doors to Opportunity" will take us there. And our Values – especially
to Put People First and to Embrace Change – will provide the foundation for how to invest in
our people and keep innovation alive at Marriott International.
We’re on the road to creating "raving fans" for our brands, our channels and our portfolio.

1.11 Culture & Beliefs

The Fairfield brand is the namesake of Fairfield Farm, J. Willard Marriott’s favourite vacation
home in the Blue Ridge Mountains of Virginia. Known for being a sanctuary of warm
hospitality and simple comforts, the farm is the inspiration for the way Fairfield teams all over
the world serve guests today. Since the first Fairfield opened its doors in Atlanta, Georgia, this

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Tradition of providing warm hospitality serves as the foundation for our Guest Promises and
our brand’s commitment that every guest leaves satisfied.
• We deliver memorable moments every day, everywhere, every time.
• We enjoy serving with our “Yes I Can!” spirit.
• We grow talent, talent grows us.
• We are many minds, with one mindset.
• We value open and direct interactions to build trust.
• We believe anything is possible.
• We have fun in all that we do.

1.12 MARRIOTT PORTFOLIO

At Marriott Hotel Group, have engineered our global portfolio of brands to meet the needs of
the changing travel sector. Eight distinctive hotel brands have clear brand segmentation with
no overlapping.

Figure 1: Marriott Portfolio

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1.13 A Global Presence

Marriott International is an American multinational diversified hospitality company that

manages and franchises a broad portfolio of hotels and related lodging facilities. Founded
by J. Willard Marriott, the company is now led by his son, Executive Chairman Bill Marriott,
and President and Chief Executive Officer Arne Sorenson. Marriott International is the third
largest hotel chain in the world.[3] It has 30 brands with 7,003 properties in 131 countries and
territories around the world,[1][2][4] over 1,332,826 rooms (as of March 31,
2019),[1] including 2,035 that are managed with 559,569 rooms, 4,905 that are franchised or
licensed with 756,156 rooms, and 63 that are owned or leased with 17,101 rooms,[1] plus an
additional 475,000 rooms in the development pipeline and an additional 25,000 rooms
approved for development but not yet under signed contracts.[1][5][6][7]
It is headquartered in Bethesda, Maryland, in the Washington, D.C. metropolitan area.[8] In
2017, Marriott was ranked #33 on Fortune's "100 Best Companies to Work For" list, its
twentieth appearance on the list.[9]

1.14 Marriott Brands

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 FAIRFIELD BY MARRIOTT
1.11.1Location

This informal hotel in a business area is 7 km from the HAL Heritage Centre and Aerospace
Museum, 10 km from the Shivoham Shiva Temple complex and 2 km from Hoodi Halt
railway station.

Nearby business hubs:

 RMZ NXT – 1.1 km

 Kalyani Techpark – 2.5 km
 International Tech Park Bangalore – 4 km
 Bagmane Constellation Business Park – 5 km
 Prestige Shantiniketan – 4.9 km

1.11.2 Rooms

Hotel with 104 rooms with Two categories in the heart of Bengaluru at the Fairfield by
Marriott Bengaluru. Advantage of free high-speed, wireless Internet to keep in touch with home
or the office, or finishing touches on a business presentation at the spacious work desk.

Fairfield Superior Rooms - 74

Superior Room, which features the choice of a king bed or twin bed. Take care of
business in comfort at the ergonomic work desk equipped with free high-speed, wireless
Internet, or relax in the living area, complete with a sofa and coffee table.

Fairfield Deluxe Rooms – 30

Deluxe Room with a king bed and experience welcoming amenities that include a convenient
work desk and stylish furnishings. Each Deluxe Room features necessities like a hairdryer and ironing
board to assist you in getting ready for the day, and the sleek LED TV.

1.11. Kava Kitchen

Savor delicious cuisine from India and around the globe at our hotel's light and airy
restaurant. Enjoy your favorites from the buffet or select from the curated à la carte menu.
Stop by our bar for a cocktail after a busy day in Whitefield, Bangalore

Indulge in an array of gourmet offerings from across the globe at One Kava Café, the all-day
dining restaurant at the Fairfield by Marriott.

This exquisite multi-cuisine restaurant overlooking the pool is perfect for any meal, ranging
from light snacks to delectable dinners. The extensive Super Breakfast, lunch and dinner
buffets offer Middle Eastern, Chinese, Indian and Western cuisine, while the à la carte menu
features stunning culinary offerings. For a fun night check out the live interactive kitchen.

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Fitness Center

 A fitness center in a hotel is a large room, usually containing special equipment, where
people go to do physical exercise and get fit..... The fitness center has modern exercise
equipment, including treadmill and stationary bicycle. Cardiovascular Equipment and
Free weights.

SERVICES

Guest Services

Guest will find everything need for a convenient stay in Bengaluru (formerly Bangalore) at the
Fairfield By Marriott. Enjoy a quiet meal in the privacy of room or suite with 24-hour room
service, or finishing touches on a project in the business centre, complete with print and fax
services. Advantage of valet parking and express check-out to ensure a relaxed stay.

1.11.5 MEETINGS & EVENT

Offering Two banquet venues and One boardrooms that cater to all business needs, the Fairfield by
Marriott Bengaluru is the ideal setting for hosting successful meetings and conferences.

Fairfield By Marriott has Two banquet halls

Ballroom 1 – 733.5 sqft

Ballroom 2– 733.5 Sqft

Ballroom 1&2 – 1467 sqft

Boardroom – 400 sqft

EVENT ROOM FEATURES

 Free high-speed Internet

 Lighting effects
 TV display outside each part of hall to showcase event

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 UNIT-2
HISTORY OF FINANCE
2.1 Introduction to Finance:
Finance is the study of money and how it is used. Specifically, it deals with the questions of how an individual or
company acquires the money needed - called capital in the company context - and how they then spend or invest
that money. Finance is often split into three areas: personal finance, corporate finance and public finance. At the
same time, "finance" is about the financial markets, i.e. the overall "system" that allows the flow of money, via
investments and other financial instruments, between and within these areas as facilitated by the financial
services sector. A major focus within finance is thus investment management called money management for
individuals, and asset management for institutions and finance then includes the associated securities
trading, investment banking, financial engineering and risk management.
More abstractly, "finance" is concerned with the investment and deployment of assets and liabilities over "space
and time" it is about performing valuation and asset allocation today, based on risk and uncertainty re future
outcomes, incorporating the time value of money (where the risk-appropriate discount rate is determined via
an asset pricing model). As an academic field, finance theory is studied and developed within the disciplines
of management, (financial) economics and applied mathematics. As the debate to whether finance is an art or a
science is still open, there have been recent efforts to organize a list of unsolved problems in finance.

2.2 Financial services:

An entity whose income exceeds its expenditure can lend or invest the excess income to help that excess income produce
more income in the future. Though on the other hand, an entity whose income is less than its expenditure can raise capital
by borrowing or selling equity claims, decreasing its expenses, or increasing its income. The lender can find a borrower—
a financial intermediary such as a bank—or buy notes or bonds (corporate bonds, government bonds, or mutual bonds) in
the bond market. The lender receives interest, the borrower pays a higher interest than the lender receives, and the
financial intermediary earns the difference for arranging the loan.

A bank aggregates the activities of many borrowers and lenders. A bank accepts deposits from lenders, on which it pays
interest. The bank then lends these deposits to borrowers. Banks allow borrowers and lenders, of different sizes, to
coordinate their activity.

Finance is used by individuals (personal finance), by governments (public finance), by businesses (corporate finance) and
by a wide variety of other organizations such as schools and non-profit organizations. In general, the goals of each of the
above activities are achieved through the use of appropriate financial instruments and methodologies, with consideration
to their institutional setting.

Finance is one of the most important aspects of business management and includes analysis related to the use and
acquisition of funds for the enterprise. In corporate finance, a company's capital structure is the total mix of financing
methods it uses to raise funds. One method is debt financing, which includes bank loans and bond sales. Another method
is equity financing – the sale of stock by a company to investors, the original shareholders (they own a portion of the
business) of a share. Ownership of a share gives the shareholder certain contractual rights and powers, which typically
include the right to receive declared dividends and to vote the proxy on important matters (e.g., board elections). The
owners of both bonds (either government bonds or corporate bonds) and stock (whether its preferred stock or common
stock), may be institutional investors – financial institutions such as investment banks and pension funds or private
individuals, called private investors or retail investors.

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2.3 Areas of finance:
Personal finance’s defined as the mindful planning of monetary spending and saving, while also considering
the possibility of future risk. The following steps, as outlined by the Financial Planning Standards Board [5],
suggest that an individual will understand a potentially secure personal finance plan after:

 Purchasing insurance to ensure protection against unforeseen personal events

 Understanding the effects of tax policies (tax subsidies or penalties) management of personal finances
 Understanding the effects of credit on individual financial standing
 Developing of a savings plan or financing for large purchases (auto, education, home)
 Planning a secure financial future in an environment of economic instability
 Pursuing a checking and/or a savings account
 Preparing for retirement/ long term expenses

Warren Buffett CEO & chairman of Berkshire Hathaway, American investor, business magnate, and
philanthropist. He is considered by some to be one of the most successful investors in the world.

Personal finance may involve paying for education, financing durable goods such as real estate and cars,
buying insurance, e.g. health and property insurance, investing and saving for retirement.

Personal finance may also involve paying for a loan, or debt obligations. The six key areas of personal financial
planning, as suggested by the Financial Planning Standards Board, are:

1. Financial position:

Is concerned with understanding the personal resources available by examining net worth and
household cash flows. Net worth is a person's balance sheet, calculated by adding up all assets under
that person's control, minus all liabilities of the household, at one point in time. Household cash flows
total up all from the expected sources of income within a year, minus all expected expenses within the
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 same year. From this analysis, the financial planner can determine to what degree and in what time the
personal goals can be accomplished. Ratios are frequently used on the corporate level to measure a
company's ability to cover its cost given the assets it has on hand. This can be paralleled to an individual
level as well. Maintaining a ratio of 2:1 or greater is seen as healthy in this respect.[7] This means that
for every dollar of expenses there is an existing dollar value of assets such as cash to cover that cost.

2. Adequate protection:

The analysis of how to protect a household from unforeseen risks. These risks can be divided into the
following: liability, property, death, disability, health and long term care. Some of these risks may be
self-insurable, while most will require the purchase of an insurance contract. Determining how much
insurance to get, at the most cost-effective terms requires knowledge of the market for personal
insurance. Business owners, professionals, athletes, and entertainers require specialized insurance
professionals to adequately protect themselves. Since insurance also enjoys some tax benefits, utilizing
insurance investment products may be a critical piece of the overall investment planning.

3. Tax planning:

Typically the income tax is the single largest expense in a household. Managing taxes is not a question
of if you will pay taxes, but when and how much. Governments give many incentives in the form of tax
deductions and credits, which can be used to reduce the lifetime tax burden. Most modern governments
use a progressive tax. Typically, as one's income grows, a higher marginal rate of tax must be paid.
Understanding how to take advantage of the myriad tax breaks when planning one's personal finances
can make a significant impact, which can save you money in the long term.

4. Investment and accumulation goals:

Planning how to accumulate enough money – for large purchases and life events – is what most people
consider to be financial planning. Major reasons to accumulate assets include purchasing a house or car,
starting a business, paying for education expenses, and saving for retirement. Achieving these goals
requires projecting what they will cost, and when you need to withdraw funds that will be necessary to
be able to achieve these goals. A major risk to the household in achieving their accumulation goal is the
rate of price increases over time, or inflation. Using net present value calculators, the financial planner
will suggest a combination of asset earmarking and regular savings to be invested in a variety of
investments. In order to overcome the rate of inflation, the investment portfolio has to get a higher rate
of return, which typically will subject the portfolio to a number of risks. Managing these portfolio risks
is most often accomplished using asset allocation, which seeks to diversify investment risk and
opportunity. This asset allocation will prescribe a percentage allocation to be invested in stocks (either
preferred stock or common stock), bonds (for example mutual bonds or government bonds, or corporate
bonds), cash and alternative investments. The allocation should also take into consideration the personal
risk profile of every investor, since risk attitudes vary from person to person.

5. Retirement planning:

Is the process of understanding how much it costs to live at retirement, and coming up with a plan to
distribute assets to meet any income shortfall. Methods for retirement plans include taking advantage of
government allowed structures to manage tax liability including: individual structures, or employer
sponsored retirement plans, annuities and life insurance products. Oftentimes this field of personal
finance is overlooked as many individuals see this being something in their distant future. However, the
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 sooner you start investing the greater likelihood you have for actually being prepared. Accrual
compounding from the prime "work years" can create a significant impact down the road as these
earlier donation years will have more time to compound on themselves giving the individual more
wiggle room in their future for unexpected unforeseen events. With every additional year of missed
contributions, this creates more tension on the individual to contribute a greater sum leading up to the
maturity date of what they may have always thought would be their retirement age. In the same respect
an individual who is able to attain a healthy amount of wealth at a young age may then be able to invest
it into a mutual fund or stocks accordingly depending on how much they believe they will need to
maintain their standard of living once retirement arrives. Allocating a portfolio according to your goals is
crucial and also needs to be continuously adjusted as your personal needs and desires change.
Oftentimes, individuals will allocate 80% of their earnings into stocks while there is still room for error
(more time away from retirement) with only 20% being distributed to mutual funds as these are
considered more 'steady' streams of investment. As an individual begins to get closer to their retirement,
oftentimes they will gradually adjust these allocations to have a greater percentage in their mutual fund
section to solidify their gains and only leave 20% to still generate higher returns. This allocation is
commonly recommended by financial planners as it allows the individual to build capital in their work
years and keep their gains safe in the long run, leaving less room for volatility.

6. Estate planning:

Involves planning for the disposition of one's assets after death. Typically, there is a tax due to the state
or federal government at one's death. Avoiding these taxes means that more of one's assets will be
distributed to one's heirs. One can leave one's assets to family, friends or charitable groups.

2.4 Corporate finance:

Jack Welch, an American business executive, author, and chemical engineer. He was chairman and CEO
of General Electric between 1981 and 2001. During his tenure at GE, the company's value rose 4,000%.
Corporate finance deals with the sources of funding and the capital structure of corporations, the actions that
managers take to increase the value of the firm to the shareholders, and the tools and analysis used to allocate

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financial resources. Although it is in principle different from managerial finance which studies the financial
management of all firms, rather than corporations alone, the main concepts in the study of corporate finance are
applicable to the financial problems of all kinds of firms.
Corporate finance generally involves balancing risk and profitability, while attempting to maximize an entity's
assets, net incoming cash flow and the value of its stock, and generically entails three primary areas of capital
resource allocation.

 In the first, "capital budgeting", management must choose which "projects" (if any) to undertake. The
discipline of capital budgeting may employ standard business valuation techniques or even extend to real
options valuation; see Financial modeling.
 The second, "sources of capital" relates to how these investments are to be funded: investment capital can
be provided through different sources, such as by shareholders, in the form of equity (privately or via
an initial public offering), creditors, often in the form of bonds, and the firm's operations (cash flow). Short-
term funding or working capital is mostly provided by banks extending a line of credit. The balance between
these elements forms the company's capital structure.
 The third, "the dividend policy", requires management to determine whether any unappropriated profit
(excess cash) is to be retained for future investment / operational requirements, or instead to be distributed
to shareholders, and if so, in what form.

Short term financial management is often termed "working capital management", and relates to cash-, inventory-
and debtors management.
Corporate finance also includes within its scope business valuation, stock investing, or investment management.
An investment is an acquisition of an asset in the hope that it will maintain or increase its value over time that
will in hope give back a higher rate of return when it comes to disbursing dividends. In investment
management – in choosing a portfolio – one has to use financial analysis to determine what, how
much and when to invest. To do this, a company must:

 Identify relevant objectives and constraints: institution or individual goals, time horizon, risk aversion and
tax considerations;
 Identify the appropriate strategy: active versus passive hedging strategy
 Measure the portfolio performance

James Harris Simons American mathematician, hedge fund manager, and philanthropist. He is known as
a quantitative investor and in 1982 founded Renaissance Technologies, a private hedge fund based in East
Setauket, NY.
Financial management overlaps with the financial function of the accounting profession. However, financial
accounting is the reporting of historical financial information, while financial management is concerned with

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the allocation of capital resources to increase a firm's value to the shareholders and increase their rate of return
on the investments.
Financial risk management, an element of corporate finance, is the practice of creating and protecting economic
value in a firm by using financial instruments to manage exposure to risk, particularly credit risk and market risk.
(Other risk types include foreign exchange, shape, volatility, sector, liquidity, inflation risks, etc.) It focuses on
when and how to hedge using financial instruments; in this sense it overlaps with financial engineering. Similar
to general risk management, financial risk management requires identifying its sources, measuring it, and
formulating plans to address these, and can be qualitative and quantitative. In the banking sector worldwide,
the Basel Accords are generally adopted by internationally active banks for tracking, reporting and exposing
operational, credit and market risks.
2.5 Capital
Capital, in the financial sense, is the money that gives the business the power to buy goods to be used in the
production of other goods or the offering of a service. (Capital has two types of sources, equity, and debt).
The deployment of capital is decided by the budget. This may include the objective of business, targets set, and
results in financial terms, e.g., the target set for sale, resulting cost, growth, and required investment to achieve
the planned sales, and financing source for the investment.
A budget may be long term or short term. Long term budgets have a time horizon of 5–10 years giving a vision
to the company; short term is an annual budget which is drawn to control and operate in that particular year.
Budgets will include proposed fixed asset requirements and how these expenditures will be financed. Capital
budgets are often adjusted annually (done every year) and should be part of a longer-term Capital Improvements
Plan.
A cash budget is also required. The working capital requirements of a business are monitored at all times to
ensure that there are sufficient funds available to meet short-term expenses.
The cash budget is basically a detailed plan that shows all expected sources and uses of cash when it comes to
spending it appropriately. The cash budget has the following six main sections:

1. Beginning cash balance – contains the last period's closing cash balance, in other words, the remaining
cash of the last year.
2. Cash collections – includes all expected cash receipts (all sources of cash for the period considered,
mainly sales)
3. Cash disbursements – lists all planned cash outflows for the period such as dividends, excluding
interest payments on short-term loans, which appear in the financing section. All expenses that do not
affect cash flow are excluded from this list (e.g. depreciation, amortization, etc.)
4. Cash excess or deficiency – a function of the cash needs and cash available. Cash needs are determined
by the total cash disbursements plus the minimum cash balance required by company policy. If the total
cash available is less than cash needs, a deficiency exists.
5. Financing – discloses the planned borrowings and repayments of those planned borrowings, including
interest.

2.6 Public finance

Public finance describes finance as related to sovereign states and sub-national entities (states/provinces,
counties, municipalities, etc.) and related public entities (e.g. school districts) or agencies. It usually

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encompasses a long-term strategic perspective regarding investment decisions that affect public entities. These
long-term strategic periods usually encompass five or more years. Public finance is primarily concerned with:

 Identification of required expenditure of a public sector entity

 Source(s) of that entity's revenue
 The budgeting process
 Debt issuance (municipal bonds) for public works projects

Central banks, such as the Federal Reserve System banks in the United States and Bank of England in
the United Kingdom, are strong players in public finance, acting as resort as well as strong influences on
monetary and credit conditions in the economy.

2.7 Financial theory

Financial economics

Financial economics is the branch of economics studying the interrelation of financial variables, such
as prices, interest rates and shares, as opposed to goods and services. Financial economics concentrates on
influences of real economic variables on financial ones, in contrast to pure finance. It centers on managing
risk in the context of the financial markets, and the resultant economic and financial models.

It essentially explores how rational investors would apply risk and return to the problem of
an investment policy. Here, the twin assumptions of rationality and market efficiency lead to modern portfolio
theory (the CAPM), and to the Black–Scholes theory for option valuation; it further studies phenomena and
models where these assumptions do not hold, or are extended.

"Financial economics", at least formally, also considers investment under "certainty" (Fisher separation
theorem, "theory of investment value", Modigliani–Miller theorem) and hence also contributes to corporate
finance theory.

Financial econometrics is the branch of financial economics that uses econometric techniques to parameterize
the relationships suggested.

Although they are closely related, the disciplines of economics and finance are distinct. The "economy" is a
social institution that organizes a society's production, distribution, and consumption of goods and services,
all of which must be financed.

Financial mathematics:

Financial mathematics is a field of applied mathematics, concerned with financial markets. The subject has a
close relationship with the discipline of financial economics, which is concerned with much of the underlying
theory that is involved in financial mathematics. Generally, mathematical finance will derive, and extend,
the mathematical or numerical models suggested by financial economics. In terms of practice, mathematical
finance also overlaps heavily with the field of computational finance (also known as financial engineering).
Arguably, these are largely synonymous, although the latter focuses on application, while the former focuses
on modeling and derivation (see: Quantitative analyst). The field is largely focused on the modelling

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 of derivatives, although other important subfields include insurance mathematics and quantitative portfolio
problems. See Outline of finance: Mathematical tools; Outline of finance: Derivatives pricing.

Experimental finance aims to establish different market settings and environments to observe experimentally and
provide a lens through which science can analyze agents' behavior and the resulting characteristics of trading
flows, information diffusion, and aggregation, price setting mechanisms, and returns processes. Researchers in
experimental finance can study to what extent existing financial economics theory makes valid predictions and
therefore prove them, and attempt to discover new principles on which such theory can be extended and be applied
to future financial decisions. Research may proceed by conducting trading simulations or by establishing and
studying the behavior, and the way that these people act or react, of people in artificial competitive market-like
settings.

Behavioral finance:
Behavioral finance studies how the psychology of investors or managers affects financial decisions and markets
when making a decision that can impact either negatively or positively on one of their areas. Behavioral finance
has grown over the last few decades to become central and very important to finance.
Behavioral finance includes such topics as:

1. Empirical studies that demonstrate significant deviations from classical theories.

2. Models of how psychology affects and impacts trading and prices
3. Forecasting based on these methods.
4. Studies of experimental asset markets and the use of models to forecast experiments.

A strand of behavioral finance has been dubbed quantitative behavioral finance, which uses mathematical and
statistical methodology to understand behavioral biases in conjunction with valuation. Some of these endeavors
has been led by Gunduz Caginalp (Professor of Mathematics and Editor of Journal of Behavioral Finance during
2001–2004) and collaborators including Vernon Smith (2002 Nobel Laureate in Economics), David Porter, Don
Balenovich, Vladimira Ilieva, Ahmet Duran). Studies by Jeff Madura, Ray Sturm, and others have demonstrated
significant behavioral effects in stocks and exchange traded funds. Among other topics, quantitative behavioral
finance studies behavioral effects together with the non-classical assumption of the finiteness of assets.

2.8 Professional qualifications:

There are several related professional qualifications that can lead to the field:

 Generalist Finance qualifications:

o Degrees: Master of Science in Finance (MSF), Master of Finance (M.Fin), Master of Applied
Finance (MAppFin), Master of Management / Master of Commerce / Master of Liberal Arts in Finance.
o Certifications: Chartered Financial Analyst (CFA), Certified Treasury Professional (CTP), Certified
Valuation Analyst (CVA), Certified Patent Valuation Analyst (CPVA), Chartered Business Valuator
(CBV), Certified International Investment Analyst (CIIA), Financial Risk Manager (FRM), Professional Risk
Manager (PRM), Association of Corporate Treasurers (ACT), Certified Market Analyst (CMA/FAD) Dual

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 Designation, Corporate Finance Qualification (CF), Chartered Alternative Investment Analyst (CAIA),
Chartered Investment Manager (CIM), Financial Modeling & Valuation Analyst (FMVA).
o Quantitative Finance qualifications: Master of Financial Engineering (MSFE), Master of Quantitative
Finance (MQF), Master of Computational Finance (MCF), Master of Financial Mathematics (MFM),
Certificate in Quantitative Finance (CQF).
o Business qualifications: Master of Business Administration (MBA), Master of
Management (MM), Master of Commerce (M.Com), Master of Science in Management (MSM), Doctor
of Business Administration (DBA)
o Accountancy qualifications:
o Qualified accountant: Chartered Certified Accountant (ACCA, UK certification), Chartered
Accountant (ACA – England & Wales certification / CA – certification in Scotland and Commonwealth
countries), Certified Public Accountant (CPA, US certification), ACMA/FCMA (Associate/Fellow
Chartered Management Accountant) from Chartered Institute of Management Accountant (CIMA),
UK. Certified Management Accountant (CMA) from Institute of Management Accountants, US
certification.
o Non-statutory qualifications: Chartered Cost Accountant CCA Designation from AAFM

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 UNIT-3
ACCOUNTS PAYABLE

Definition: When a company purchases goods on credit which needs to be paid back in a short period of time,
it is known as Accounts Payable. It is treated as a liability and comes under the head ‘current liabilities’.
Accounts Payable is a short-term debt payment which needs to be paid to avoid default.

3.1 Accounts Payable Process

The accounts payable process or function is immensely important since it involves nearly all of a company's
payments outside of payroll. The accounts payable process might be carried out by an accounts payable
department or by a bookkeeper or perhaps the owner in a small business.in a large corporation, by a small staff
in a medium-sized company,

Regardless of the company's size, the mission of accounts payable is to pay only the company's bills and
invoices that are legitimate and accurate. This means that before a vendor's invoice is entered into the
accounting records and scheduled for payment, the invoice must reflect:
 what the company had ordered
 what the company has received
 the proper unit costs, calculations, totals, terms, etc.
To safeguard a company's cash and other assets, the accounts payable process should have internal controls. A
few reasons for internal controls are to:
 prevent paying a fraudulent invoice
 prevent paying an inaccurate invoice
 prevent paying a vendor invoice twice
 be certain that all vendor invoices are accounted for
Periodically companies should seek professional assistance to improve its internal controls.

The accounts payable process must also be efficient and accurate in order for the company's financial statements
to be accurate and complete. Because of double-entry accounting an omission of a vendor invoice will actually
cause two accounts to report incorrect amounts. For example, if a repair expense is not recorded in a timely
manner:

1. the liability will be omitted from the balance sheet, and

2. The repair expense will be omitted from the income statement.
If the vendor invoice for a repair is recorded twice, there will be two problems as well:

1. the liabilities will be overstated, and

2. Repairs expense will be overstated.

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In other words, without the accounts payable process being up-to-date and well run, the company's management
and other users of the financial statements will be receiving inaccurate feedback on the company's performance
and financial position.

A poorly run accounts payable process can also mean missing a discount for paying some bills early. If vendor
invoices are not paid when they become due, supplier relationships could be strained. This may lead to some
vendors demanding cash on delivery. If that were to occur it could have extreme consequences for a cash-
strapped company.

Just as delays in paying bills can cause problems, so could paying bills too soon. If vendor invoices are paid
earlier than necessary, there may not be cash available to pay some other bills by their due dates.

3.1.1 Purchase order

A purchase order or PO is prepared by a company to communicate and document precisely what the company
is ordering from a vendor. The paper version of a purchase order is a multi-copy form with copies distributed to
several people. The people or departments receiving a copy of the PO include:
 the person requesting that a PO be issued for the goods or services
 the accounts payable department
 the receiving department
 the vendor
 the person preparing the purchase order
The purchase order will indicate a PO number, date prepared, company name, vendor name, name and phone
number of a contact person, a description of the items being purchased, the quantity, unit prices, shipping
method, date needed, and other pertinent information.

One copy of the purchase order will be used in the three-way match, which we will discuss later.

3.1.2Receiving report
A receiving report is a company's documentation of the goods it has received. The receiving report may be a
paper form or it may be a computer entry. The quantity and description of the goods shown on the receiving
report should be compared to the information on the company's purchase order.

After the receiving report and purchase order information are reconciled, they need to be compared to the
vendor invoice. Hence, the receiving report is the second of the three documents in the three-way match (which
will be discussed shortly).

3.1.3 Vendor Invoice

The supplier or vendor will send an invoice to the company that had received the goods and/or services on
credit. When the invoice or bill is received, the customer will refer to it as a vendor invoice. Each vendor
invoice is routed to accounts payable for processing. After the invoice is verified and approved, the amount will
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be credited to the company's Accounts Payable account and will also be debited to another account (often as an
expense or asset).

A common technique for verifying a vendor invoice is the three-way match.

3.1.4 Three-way match

The accounts payable process often uses a technique known as the three-way match to assure that only valid and
accurate vendor invoices are recorded and paid. The three-way match involves the following:

Only when the details in the three documents are in agreement will a vendor's invoice be entered into the
Accounts Payable account and scheduled for payment.

Good internal control of a company's resources is enhanced when the company assigns a separate employee
with a specific, limited responsibility. The following chart illustrates the concept of the separation (or
segregation) of duties involving accounts payable:

When the duties are separated, it will require more than one dishonest person to steal from the company. Hence,
small companies without sufficient staff to separate employees' responsibilities will have a greater risk of theft.

To illustrate the three-way match, let's assume that BuyerCo needs 10 cartridges of toner for its printers.
BuyerCo issues a purchase order to SupplierCorp for 10 cartridges at 4260per cartridge that are to be delivered
in 10 days. One copy of the PO is sent to SupplierCorp, one copy goes to the person requisitioning the
cartridges, one copy goes to the receiving department, one copy goes to accounts payable, and one copy is
retained by the person preparing the PO. When BuyerCo receives the cartridges, a receiving report is prepared.

The three-way match involves comparing the following information:

1. The description, quantity, cost and terms on the company's purchase order.
2. The description and quantity of goods shown on the receiving report.
3. The description, quantity, cost, terms, and math on the vendor invoice.
After determining that the information reconciles, the vendor invoice can be entered into the liability account
Accounts Payable. The information entered into the accounting software will include invoice reference
information (vendor name or code, invoice number and date, etc.), the amount to be credited to Accounts
Payable, the amount(s) and account(s) to be debited and the date that the payment is to be made. The payment
date is based on the terms shown on the invoice and the company's policy for making payments.

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Lastly, the documents should be stamped or perforated to indicate they have been entered into the accounting
system thus avoiding a duplicate payment.

3.1.5 Vouchers
Some companies use a voucher in order to document or "vouch for" the completeness of the approval process.
You can visualize a voucher as a cover sheet for attaching the supporting documents (purchase order, receiving
report, vendor's invoice, etc.) and for noting the approvals, account numbers, and other information for each
vendor invoice or bill.
When the vendor invoice is paid, the voucher and its attachments (including a copy of the check that was
issued) will be stored in a paid voucher/invoice file. If paper documents are involved, an office machine could
perforate the word "PAID" through the voucher and its attachments. This is done to assure that a duplicate
payment will not occur.
The unpaid invoices and vouchers will be held in an open file.

3.1.6 Vendor invoices without purchase orders or receiving reports

Not all vendor invoices will have purchase orders or receiving reports. Hence, the three-way match is not
always possible. For example, a company does not issue a purchase order to its electric utility for a pre-
established amount of electricity for the following month. The same is true for the telephone, natural gas, sewer
and water, freight-in, and so on.

There are also payments that are required every month in order to fulfill lease agreements or other contracts.
Examples include the monthly rent for a storage facility, office rent, automobile payments, equipment leases,
maintenance agreements, etc. Even though these obligations will not have purchase orders, the responsibility is
unchanged: pay only the amounts that are legitimate and accurate.

3.1.7 Statements from vendors

Vendors often send statements to their customers to indicate the amounts (listed by invoice number) that remain
unpaid. When a vendor statement is received the details on the statement should be compared to the company's
records.

The fact that a company can be receiving both invoices and statements from a vendor means there is the
potential of a duplicate payment. In order to avoid making a duplicate payment, companies often establish the
following rule: Pay only from vendor invoices; never pay from vendor statements.

3.2 Related Expense or Asset

The vendor invoices received by a company could involve the following:

1. A vendor invoice may be a bill for a repair or maintenance service. The vendor's credit terms allow the
company to pay 30 days after the date of the service. Since repairs and maintenance do not create more
assets, the cost of the service should be reported on the income statement as an expense. Under the
accrual method of accounting the expense is reported in the accounting period in which the service
occurred (not the period in which it is paid). Other examples of expenses include the cost of office
expenses such as electricity and telephone, consulting, and more.
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 2. A vendor invoice may be a bill for the purchase of expensive equipment that will be used by the
company for several years. The equipment will be recorded as an asset and will be reported in the
company's balance sheet section property, plant and equipment. As the equipment is utilized, its cost
will be moved from the balance sheet to the income statement account Depreciation Expense.
3. Another vendor invoice may be a billing for the cost of a service that the vendor will provide in the
future, but the payment must be made in advance. A common example is an insurance company's
invoice for the premiums covering the next six months of insurance on the company's automobiles. The
company will initially debit the invoice amount to a current asset such as Prepaid Expenses. As the
insurance expires, the cost will be allocated to Insurance Expense.

The three examples illustrate that some vendor invoices will be immediately recorded as expenses while other
invoices are initially recorded as assets. The accounts payable staff needs to be instructed as to the proper
accounts to be debited when vendor invoices are entered as credits to Accounts Payable. Generally, a cost that is
used up and has no future economic value that can be measured is debited immediately to expense. Vendor
invoices for property, plant and equipment are not expensed immediately. Instead, the cost is recorded in a
balance sheet asset account and will be expensed in increments during the asset's useful life. Lastly, a prepaid
expense is initially recorded in a current asset account and will be allocated to expense as the cost expires.

3.3 End of the Period Cut-Off

accounts payable processing be up-to-date. If it is not up-to-date, the income statement for the accounting
period will At the end of every accounting period (year, quarter, month, 5-week period, etc.) it is important that
the likely be omitting some expenses and the balance sheet at the end of the accounting period will be omitting
some liabilities.

During the first few days after an accounting period ends, it is important for the accounts payable staff to
closely examine the incoming vendor invoices. For example, a 63,900rs repair bill received on January
6 may be a December repair expense and a liability as of December 31. Another vendor invoice received on
January 6 may not have been an obligation as of December 31 and is actually a January expense.
It is also necessary to review the receiving reports that have not yet been matched to vendor invoices. If items
were ordered and received prior to December 31, the amounts must be recorded as of December 31 through an
accrual-type adjusting entry.

3.4 Accruing Expenses and Liabilities

At the end of every accounting period there will be some vendor invoices and receiving reports that have not
yet been approved or fully matched. As a result these amounts will not have been entered into the Accounts
Payable account (and the related expense or asset account). These documents should be reviewed in order to
determine whether a liability and an expense have actually been incurred by the company as of the end of the
accounting period.
Since the accrual method of accounting requires that all of a company's liabilities and expenses must be
reported on the financial statements, companies should prepare an accrual-type adjusting entry at the end of
every accounting period. This adjusting entry will credit Accrued Liabilities and will debit the appropriate
expense or other account for the amounts that were incurred but are not yet included in Accounts Payable. The
balance in Accrued Liabilities will be reported in the current liability section of the balance sheet immediately
after Accounts Payable.
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It is also common for companies to prepare a reversing entry every month. The reversing entry removes the
previous period's accrual adjusting entry and prevents the double-counting of an expense that could occur when
the actual vendor invoice is processed.

3.5 Adding General Ledger Accounts

The general ledger accounts that are available for recording transactions are found in the company's chart of
accounts. For most businesses the general ledger accounts are listed in the following order:
1. Balance sheet accounts
o Asset accounts
o Liability accounts
o Stockholders' or owner's equity accounts
2. Income statement accounts
o Operating revenue accounts
o Operating expense accounts
o Nonoperating revenue and gain accounts
o Nonoperating expense and loss accounts
Many systems will allow for each account to have subaccounts. Subaccounts allow for summarizing or
combining amounts while also maintaining the detailed amounts.
When the existing accounts are not sufficient, new accounts should be added. In other words, meaningful
financial reporting of transactions should not be limited to a preconceived list of accounts.

3.6 Invoice Credit Terms

The invoice terms indicate when an invoice becomes due and whether a discount may be taken if the invoice is
paid sooner. The invoice terms also dictate the point at which ownership of goods will transfer from the seller to
the buyer.

The following payment terms are some of the more common ones for businesses without inventories.

Net due upon receipt

If the vendor's terms are Net due upon receipt, the invoice amount is due immediately. (Of course, you should
verify that the invoice is valid and accurate before it is entered for payment.)

Net 30 days
When the vendor invoice states Net 30 days, the amount of the invoice (minus any returns or allowances) is due
30 days from the date of the invoice. For example, if a vendor invoice for 71,000rs is dated June 1 and the
company is granted a 7100rs allowance, the net amount of 63,900rs should be paid by July 1. (If there were no
allowance, the company should remit 71,000rs by July 1.)

1/10, n/30
When a vendor invoice includes terms of 1/10, n/30, the "1" represents 1% of the amount owed, the "10"
represents 10 days, the "n" represents the word net, and the "30" represents 30 days. The terms 1/10,
n/30 indicate that the buyer may take an early payment discount of 1% of the amount owed if the amount owed
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is remitted within 10 days instead of the normal 30 days. In other words, the buyer can choose either of the
following:
 Pay within 10 days and deduct 1% of the net amount owed (the invoice amount minus any authorized
returns and/or allowances), or
 Pay in 30 days and take no discount.
To illustrate1/10, n/30, let's assume that a vendor invoice for 71,000rs is dated June 1 and the buyer does not
return any of the goods. Since there are no returns, the net amount of the purchase is the full 71,000rs and the
buyer can remit either of the following amounts:
 If paying by June 10, the amount due to the vendor is 70,290rs. [The net amount of 71,000rs minus the
710rs early payment discount (which is 1% of 71,000rs).]
 If paying by July 1, the net amount of 71,000rs is due.
If the buyer was given an allowance of 7100rs, the net amount is 63,900rs. In that case the buyer can remit
either of the following amounts:

 If paying by June 10, the amount due to the vendor is 63,261rs. [The net amount of 63,900rs minus
639rs (which is 1% of 63,900).]
 If paying by July 1, the net amount of 63,900rs is due.

2/10, n/30
If the vendor's invoice has terms of 2/10, n/30, the "2" represents 2%, the "10" represents 10 days, the "n"
represents the word net and the "30" represents 30 days. This means that the buyer can take an early payment
discount of 2% of the amount owed if the amount is remitted within 10 days instead of the customary 30 days.
In other words, the buyer can choose either of the following:
 Pay within 10 days and deduct 2% of the net amount (invoice amount minus any authorized returns
and/or allowances), or
 Pay the full amount in 30 days with no discount.
To illustrate 2/10, n/30, assume that a vendor's invoice for 71,000rs is dated June 1 and the vendor has granted
the buyer an allowance of 7100rs. This means the net amount is 63,900rs and that only 63,900rs will be eligible
for the early payment discount. Hence, the buyer can remit either of the following amounts:
 If paying by June 10, the amount due to the vendor 62,622rs. [The net amount of 63,900 minus 1278rs
(which is 2% of 63,900rs).]
 If paying by July 1, the net amount of 63,900rs is due.

3.7 Other
Vendor or employee?
Occasionally an individual will provide services for a company and submits an invoice. The invoice is
processed through accounts payable and in the U.S. the company may be required to issue the individual an IRS
Form 1099-MISC in January of the following year.

While the company views the individual as an independent contractor, the Internal Revenue Service rules may
dictate that the individual is actually a part-time employee. If a person is deemed to be an employee, the Internal
Revenue Service requires that payroll taxes be withheld and a Form W-2 be issued instead of Form 1099-MISC.

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Internal controls
In order to protect a company's assets it is important that a company have in place a variety of controls over
issuing purchase orders, issuing checks, adding vendors to the accounts payable master vendor file, segregating
duties, and other safeguards referred to as internal controls.

We recommend that a professional who is well-versed in internal controls perform a review of your company's
policies and procedures.

Batching the payments to vendors

In order for the accounts payable staff to operate efficiently, it is helpful to process the checks written to
vendors only on specified days each month. Writing the checks on pre-announced days will hopefully
discourage the need for "rush" checks and allow the accounts payable processing to be more efficient.

Sales and use taxes

Certain purchases of goods and/or services may be subject to state sales taxes. If a sales tax is not paid for
the sales-taxable goods or services (even from out-of-state vendors), the buyer is likely to be liable for a
state use tax. To further complicate the situation, some organizations may be exempt from both a sales tax and a
use tax depending on the state laws.
The responsibility for compliance with sales and use taxes rests with each company. As a result, companies
must be familiar with the laws of the states in which they operate.

3.8 General Ledger Account: Accounts Payable

The general ledger account Accounts Payable or Trade Payables is a current liability account, since the amounts
owed are usually due in 10 days, 30 days, 60 days, etc. The balance in Accounts Payable is usually presented as
the first or second item in the current liability section of the balance sheet. (Many companies report Notes
Payable due within one year as the first item.)
As a liability account, Accounts Payable is expected to have a credit balance. Hence, a credit entry will increase
the balance in Accounts Payable and a debit entry will decrease the balance.

A bill or invoice from a supplier of goods or services on credit is often referred to as a vendor invoice. The
vendor invoices are entered as credits in the Accounts Payable account, thereby increasing the credit balance in
Accounts Payable. When a company pays a vendor, it will reduce Accounts Payable with a debit amount. As a
result, the normal credit balance in Accounts Payable is the amount of vendor invoices that have been recorded
but have not yet been paid. The unpaid invoices are sometimes referred to as open invoices.
Accounting software allows companies to sort its accounts payable according to the dates when payments will
be due. This feature and the resulting report are known as the aging of accounts payable.

Entering a vendor invoice into Accounts Payable

Prior to entering a vendor invoice into Accounts Payable, the invoice should be reviewed and approved. The
reason is that a vendor invoice may contain errors (incorrect quantities, incorrect prices, math errors, etc.) and
some invoices may not be legitimate.

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After a vendor invoice has been approved, the recording of the invoice will include:

 A credit to Accounts Payable, and

 A minimum of one debit to another account. The debit amount usually involves one of the following:
o An expense (Repairs & Maintenance Expense, Advertising Expense, Rent Expense, etc.)
o A prepaid asset (Prepaid Expenses, Prepaid Insurance)
o A fixed or plant asset (Equipment, Fixtures, Vehicles, etc.).
When a company pays part or all of a previously recorded vendor invoice, the balance in Accounts Payable will
be reduced with a debit entry and Cash will be reduced with a credit entry.

In Fairfield by Marriott They are Using “PEOPLE SOFTWARE”.

Invoice booking
Approving Invoice
Image Uploading
Invoice Scanning

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 UNIT-4

ACCOUNTS RECEIVABLE & BADDEBTS EXPENCES

Introduction

4.1 Accounts Receivable

Definition: Accounts Receivable (AR) is the proceeds or payment which the company will receive from its
customers who have purchased its goods & services on credit. Usually the credit period is short ranging from
few days to months or in some cases maybe a year.

4.2 Bad Debts Expense

Definition
Accounts receivable that will likely remain uncollectable and will be written off. Bad debts appear as an
expense on the company's income statement, thus reducing net income.
In general, companies make an estimate of bad debt expenses that might be incurred in the current
time period based on past records as part of the process of estimating earnings. Most companies make a bad
debt allowance since it is unlikely that all of their debtors will pay them in full.

4.3 Recording Services Provided on Credit

Assume that on June 3, Malloy Design Co. provides 2,84,000rs of graphic design service to one of its clients
with credit terms of net 30 days. (Providing services with credit terms is also referred to as providing
services on account.)
Under the accrual basis of accounting, revenues are considered earned at the time when the services are
provided. This means that on June 3 Malloy will record the revenues it earned, even though Malloy will not
receive the 2,84,000rs until July. Below are the accounts affected on June 3, the day the service transaction was
completed:

In this transaction, the debit to Accounts Receivable increases Malloy's current assets, total assets, working
capital, and stockholders' (or owner's) equity—all of which are reported on its balance sheet. The credit to
Service Revenues will increase Malloy's revenues and net income—both of which are reported on its income
statement.

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4.4 Recording Sales of Goods on Credit

When a company sells goods on credit, it reports the transaction on both its income statement and its balance
sheet. On the income statement, increases are reported in sales revenues, cost of goods sold, and (possibly)
expenses. On the balance sheet, an increase is reported in accounts receivable, a decrease is reported in
inventory, and a change is reported in stockholders' equity for the amount of the net income earned on the sale.
If the sale is made with the terms FOB Shipping Point, the ownership of the goods is transferred at the seller's
dock. If the sale is made with the terms FOB Destination, the ownership of the goods is transferred at
the buyer's dock.
In principle, the seller should record the sales transaction when the ownership of the goods is transferred to the
buyer. Practically speaking, however, accountants typically record the transaction at the time the sales invoice is
prepared and the goods are shipped.

4.4.1 FOB Shipping Point

Quality Products Co. just sold and shipped ₹1,000 worth of goods using the terms FOB Shipping Point. With its
cost of goods at 80% of sales value, Quality makes the following entries in its general ledger:

(While there may be additional expenses with this transaction—such as commission expense—we are not
considering them in our example.)

FOB Shipping Point means the ownership of the goods is transferred to the buyer at the seller's dock. This
means that the buyer is responsible for transporting the goods from Quality Product's shipping dock. Therefore,
all shipping costs (as well as any damage that might be incurred during transit) are the responsibility of the
buyer.

FOB Destination
FOB Destination means the ownership of the goods is transferred at the buyer's dock. This means the seller is
responsible for transporting the goods to the customer's dock, and will factor in the cost of shipping when it sets
its price for the goods.
Let's assume that Gem Merchandise Co. makes a sale to a customer that has a sales value of 74,550rs and a cost
of goods sold at 56,800rs. This transaction affects the following accounts in Gem's general ledger:

Because Gem chooses to ship its goods FOB Destination, the ownership of the goods transfers at the buyer's
dock. Therefore, Gem Merchandise assumes all the risks and costs associated with transporting the goods.
Now let's assume that Gem pays an independent shipping company 3,350rs, to transport the goods from its
warehouse to the buyer's dock. Gem records the 3,350rs as an operating expense or selling expense (in an
account such as Delivery Expense, Freight-Out Expense, or Transportation-Out Expense). If the shipping
company allows Gem to pay in 7 days, Gem will make the following entry in its general ledger:

4.5 Credit Terms with Discounts

When a seller offers credit terms of net 30 days, the net amount for the sales transaction is due 30 days after the
sales invoice date.
To illustrate the meaning of net, assume that Gem Merchandise Co. sells 71,00rs of goods to a customer. Upon
receiving the goods the customer finds that 7100rs of the goods are not acceptable. The customer contacts Gem
and is instructed to return the unacceptable goods. This means that Gem's net sale ends up being 63,900rs; the
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customer's net purchase will also be 63,900rs (71,000rs minus the 7,100rs returned). It also means that Gem's
net receivable from this customer will be 63,900rs.

Unfortunately, companies who sell on credit often find that they don't receive payments from customers on
time. In fact, one study found that if the credit term is net 30 days, the money, on average, arrived 45 days after
the invoice date. In order to speed up these payments, some companies give credit terms that offer a discount to
those customers who pay within a shorter period of time. The discount is referred to as a sales discount, cash
discount, or an early payment discount, and the shorter period of time is known as the discount period. For
example, the term 2/10, net 30 allows a customer to deduct 2% of the net amount owed if the customer pays
within 10 days of the invoice date. If a customer does not pay within the discount period of 10 days, the net
purchase amount (without the discount) is due 30 days after the invoice date.
Using the example from above, let's illustrate how the credit term of 2/10, net 30 works. Gem Merchandise Co.
ships 63,900rs of goods and the customer returns 7,100rs of unacceptable goods to Gem within a few days. At
that point, the net amount owed by the customer is 63,900rs. If the customer pays Gem within 10 days of the
invoice date, the customer is allowed to deduct 1,278rs (2% of 63,900rs) from the net purchase of 63,900rs. In
other words, the 63,900rs amount can be settled for 62,622rs if it is paid within the 10-day discount period.
Let's assume that the sale above took place on the first day that Gem was open for business, June 1. On June 6
Gem receives the returned goods and restocks them, and on June 11 it receives 62,622rs from the buyer. Gem's
cost of goods is 80% of their original selling prices (before discounts). The above transactions are reflected in
Gem's general ledger as follows:

If the customer waits 30 days to pay Gem, the June 11 entry shown above will not occur. In its place will be the
following entry on July 1:

Examples of Amounts Due Under Varying Credit Terms

Costs of Discounts
Some people believe that the credit term of 2/10, net 30 is far too generous. They argue that when a 63,900rs
receivable is settled for 62,622rs (simply because the customer pays 20 days early) the seller is, in effect, giving
the buyer the equivalent of a 36% annual interest rate (2% for 20 days equates to 36% for 360 days). Some
sellers won't offer terms such as 2/10, net 30 because of these high percentage equivalents. Other sellers are
discouraged to find that some customers take the discount and ignore the obligation to pay within the stated
discount period.

4.6 Credit Risk

When a seller provides goods or services on credit, the resultant account receivable is normally considered to be
an unsecured claim against the buyer's assets. This makes the seller (the supplier) an unsecured creditor,
meaning it does not have a lien on any of the buyer's assets—not even on the goods that it just sold to the buyer.
Sometimes a supplier's customer gets into financial difficulty and is forced to liquidate its assets. In this
situation the customer typically owes money to lending institutions as well as to its suppliers of goods and
services. In such cases, it's the secured creditors (the banks and other lenders that have a lien on specific assets
such as cash, receivables, inventory, equipment, etc.) who are paid first from the sale of the assets. Often there
is not enough money to pay what is owed to the secured lenders, much less the unsecured creditors. In other
words, the suppliers will never be paid what they are owed.
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To avoid this kind of risk, some suppliers may decide not to sell anything on credit, but require instead that all
of its goods be paid for with cash or a credit card. Such a company, however, may lose out on sales to
competitors who offer to sell on credit.

To minimize losses, sellers typically perform a thorough credit check on any new customer before selling to
them on credit. They obtain credit reports and check furnished references. Even when a credit check is
favorable, however, a credit loss can still occur. For example, a first-rate customer may experience an
unexpected financial hardship caused by one of its customers, something that could not have been known when
the credit check was done. The point is this: any company that sells on credit to a large number of customers
should assume that, sooner or later, it will probably experience some credit losses along the way.

4.7 Allowance Method for Reporting Credit Losses

Accounts receivable are reported as a current asset on a company's balance sheet. Since current assets by
definition are expected to turn to cash within one year (or within the operating cycle, whichever is longer), a
company's balance sheet could overstate its accounts receivable (and therefore its working capital and
stockholders' equity) if any part of its accounts receivable is not collectible.

To guard against overstatement, a company will estimate how much of its accounts receivable will never be
collected. This estimate is reported in a balance sheet contra asset account called Allowance for Doubtful
Accounts. (Some companies call this account Provision for Doubtful Accounts or Allowance for Uncollectible
Accounts.) Any increases to Allowance for Doubtful Accounts are also recorded in the income statement
account Bad Debts Expense (or Uncollectible Accounts Expense).

This method of anticipating the uncollectible amount of receivables and recording it in the Allowance for
Doubtful Accounts is known as the allowance method. (If a company does not use an allowance account, it is
following the direct write-off method, which is discussed later.)

4.8 Allowance for Doubtful Accounts and Bad Debts Expense

As we stated above, the account Allowance for Doubtful Accounts is a contra asset account containing the
estimated amount of the accounts receivable that will not be collected. For example, let's assume that Gem
Merchandise Co.'s Accounts Receivable has a debit balance of 71,00,000rs at June 30. Gem anticipates that
approximately 1,42,000rs of this is not likely to turn to cash, and as a result, Gem reports a credit balance of
1,42,000rs in Allowance for Doubtful Accounts. The accounting entry to adjust the balance in the allowance
account will involve the income statement account Bad Debts Expense.

Since June was Gem's first month in business, its Allowance for Doubtful Accounts began June with a zero
balance. At June 30, when it issues its first balance sheet and income statement, its Allowance for Doubtful
Accounts will have a credit balance of 1,42,000rs. This is done using the following adjusting journal entry:

Here are some of the accounts in a T-account format:

With Allowance for Doubtful Accounts now reporting a credit balance of 1,42,000rs and Accounts Receivable
reporting a debit balance of ₹100,000, Gem's balance sheet will report a net amount of ₹98,000. Since this net
amount of ₹98,000 is the amount that is likely to turn to cash, it is referred to as the net realizable value of the
accounts receivable.
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Under the allowance method, the Gem Merchandise Co. does not need to know specifically which customer
will not pay, nor does it need to know the exact amount. This is acceptable because accountants believe it is
better to report an approximate amount that is uncollectible rather than imply that every penny of the accounts
receivable will be collected.

Gem's Bad Debts Expense will report credit losses of 1, 42,000rs on its June income statement. This expense is
being reported even though none of the accounts receivables were due in June. (Recall the credit terms were net
30 days.) Gem is attempting to follow the matching principle by matching the bad debts expense as best it can
to the accounting period in which the credit sales took place.

Now let's assume that at July 31 the Gem Merchandise Co. has a debit balance in Accounts Receivable of
₹230,000. (The balance increased during July by the amount of its credit sales and it decreased by the amount it
collected from customers.) The Allowance for Uncollectible Accounts still has the credit balance of 1, 42,000rs
from the adjustment on June 30. This means Gem's general ledger accounts before the July 31 adjustment to
Allowance for Uncollectible Accounts will be reporting a net realizable value of ₹228,000 (₹230,000 minus
₹2,000).

Gem reviews the details of its accounts receivable and estimates that as of July 31 approximately ₹10,000 of the
₹230,000 will not be collectible. In other words, the net realizable value (or net cash value) of its accounts
receivable as of July 31 is only ₹220,000 (₹230,000 minus ₹10,000). Before the July 31 financial statements are
released, Gem must adjust the Allowance for Doubtful Accounts so that its ending balance is a credit of ₹10,000
(instead of the present credit balance of ₹2,000). This requires the following adjusting entry:

After this journal entry is recorded, Gem's July 31 balance sheet will report the net realizable value of its
accounts receivables at ₹220,000 (₹230,000 debit balance in Accounts Receivable minus the ₹10,000 credit
balance in Allowance for Doubtful Accounts).

Here's a recap in T-account form:

As seen in the T-accounts above, Gem estimated that the total bad debts expense for the first two months of
operations (June and July) is ₹10,000. It is likely that as of July 31 Gem will not know the precise amount of
actual bad debts, nor will Gem know which customers are the ones that won't be paying their account balances.
However, the matching principle is better met by Gem making these estimates and recording the credit loss as
close as possible to the time the sales were made.

By reporting the ₹10,000 credit balance in Allowance for Doubtful Accounts, Gem is also adhering to the
accounting principle of conservatism. In other words, if there is some doubt as to whether there are ₹10,000 of
credit losses or no credit losses, Gem's accountant "breaks the tie" by choosing the alternative that reports a
smaller amount of profit and a smaller amount of assets. (It is reporting a net realizable value of ₹220,000
instead of the ₹230,000 of accounts receivable.) If a company knows with certainty that every penny of its
accounts receivable will be collected, then the Allowance for Doubtful Accounts will report a zero balance.
However, if it is likely that some of the accounts receivable will not be collected in full, the principle of
conservatism requires that there be a credit balance in Allowance for Doubtful Accounts.

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4.9 Writing off an Account under the Allowance Method
Under the allowance method, if a specific customer's accounts receivable is identified as uncollectible, it is
written off by removing the amount from Accounts Receivable. The entry to write off a bad account affects
only balance sheet accounts: a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable.
No expense or loss is reported on the income statement because this write-off is "covered" under the earlier
adjusting entries for estimated bad debts expense.

Let's illustrate the write-off with the following example. On June 3, a customer purchases ₹1,400 of goods on
credit from Gem Merchandise Co. On August 24, that same customer informs Gem Merchandise Co. that it has
filed for bankruptcy. The customer states that its bank has a lien on all of its assets. It also states that the
liquidation value of those assets is less than the amount it owes the bank, and as a result Gem will receive
nothing toward its ₹1,400 accounts receivable. After confirming this information, Gem concludes that it should
remove, or write off, the customer's account balance of ₹1,400.

Under the allowance method of recording credit losses, Gem's entry to write off the customer's account balance
is as follows:

The two accounts affected by this entry contain this information:

Note that prior to the August 24 entry of ₹1,400 to write off the uncollectible amount, the net realizable value of
the accounts receivables was ₹230,000 (₹240,000 debit balance in Accounts Receivable and ₹10,000 credit
balance in Allowance for Doubtful Accounts). After writing off the bad account on August 24, the net realizable
value of the accounts receivable is still ₹230,000 (₹238,600 debit balance in Accounts Receivable and ₹8,600
credit balance in Allowance for Doubtful Accounts).

The Bad Debts Expense remains at ₹10,000; it is not directly affected by the journal entry write-off. The bad
debts expense recorded on June 30 and July 31 had anticipated a credit loss such as this. It would be double
counting for Gem to record both an anticipated estimate of a credit loss and the actual credit loss.

4.9.1 Recovery of Account under Allowance Method

After a seller has written off an accounts receivable, it is possible that the seller is paid part or all of the account
balance that was written off. Under the allowance method, if such a payment is received (whether directly from
the customer or as a result of a court action) the seller will take the following two steps:

Reinstate the account that was written off by reversing the write-off entry. If we assume that the ₹1,400 written
off on Aug 24 is collected on October 10, the reinstatement of the account looks like this:

Process the ₹1,400 received on October 10:

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The seller's accounting records now show that the account receivable was paid, making it more likely that the
seller might do future business with this customer.

4.9.2 Bad Debts Expense as a Percent of Sales

Another way sellers apply the allowance method of recording bad debts expense is by using the percentage of
credit sales approach. This approach automatically expenses a percentage of its credit sales based on past
history.

For example, let's assume that a company prepares weekly financial statements. Past experience indicates that
0.3% of its sales on credit will never be collected. Using the percentage of credit sales approach, this company
automatically debits Bad Debts Expense and credits Allowance for Doubtful Accounts for 0.3% of each week's
credit sales. Let's assume that in the current week this company sells ₹500,000 of goods on credit. It estimates
its bad debts expense to be ₹1,500 (0.003 x ₹500,000) and records the following journal entry:

The percentage of credit sales approach focuses on the income statement and the matching principle. Sales
revenues of ₹500,000 are immediately matched with ₹1,500 of bad debts expense. The balance in the account
Allowance for Doubtful Accounts is ignored at the time of the weekly entries. However, at some later date, the
balance in the allowance account must be reviewed and perhaps further adjusted, so that the balance sheet will
report the correct net realizable value. If the seller is a new company, it might calculate its bad debts expense by
using an industry average until it develops its own experience rate.

4.9.3 Difference between Expense and Allowance

The account Bad Debts Expense reports the credit losses that occur during the period of time covered by the
income statement. Bad Debts Expense is a temporary account on the income statement, meaning it is closed at
the end of each accounting year. (Closed means the account balance is transferred to retained earnings, perhaps
through an income summary account.) By closing Bad Debts Expense and resetting its balance to zero, the
account is ready to receive and tally the credit losses for the next accounting year.
The Allowance for Doubtful Accounts reports on the balance sheet the estimated amount of uncollectible
accounts that are included in Accounts Receivable. Balance sheet accounts are almost
always permanent accounts, meaning their balances carry forward to the next accounting period. In other words,
they are not closed and their balances are not reset to zero.
Because the Bad Debts Expense account is closed each year, while the Allowance for Doubtful Accounts is not,
these two balances will most likely not be equal after the company's first year of operations.
For example, let's assume that at the end of its first year of operations a company's Bad Debts Expense had a
debit balance of ₹14,000 and its Allowance for Doubtful Accounts had a credit balance of ₹14,000. Because the
income statement account balances are closed at the end of the year, the company's opening balance in Bad
Debts Expense for the second year of operations is ₹0. The credit balance of ₹14,000 in Allowance for Doubtful
Accounts, however, carries forward to the second year. If an adjusting entry of ₹3,000 is made during year 2,
Bad Debts Expense will report a ₹3,000 debit balance, while Allowance for Doubtful Accounts might report a
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credit balance of ₹17,000.
Again, the reasons for the account balance differences are 1) Bad Debts Expense is a temporary account that
reports credit losses only for the period shown on the income statement, and 2) Allowance for Doubtful
Accounts is a permanent account that reports an estimated amount for all of the uncollectible receivables
reported in the asset Accounts Receivable as of the balance sheet date.

4.9.4Aging of Accounts Receivable

Download our Aging of Accounts Receivable Form and Template
The general ledger account Accounts Receivable usually contains only summary amounts and is referred to as
a control account. The details for the control account—each credit sale for every customer—is found in
the subsidiary ledger for Accounts Receivable. The total amount of all the details in the subsidiary ledger must
be equal to the total amount reported in the control account.
The detailed information in the accounts receivable subsidiary ledger is used to prepare a report known as
the aging of accounts receivable. This report directs management's attention to accounts that are slow to pay. It
is also useful in determining the balance amount needed in the account Allowance for Doubtful Accounts.
The aging of accounts receivable report is typically generated by sorting unpaid sales invoices in the subsidiary
ledger—first by customer and then by the date of the sales invoices. If a company sells merchandise (or
provides services) and allows customers to pay 30 days later, this report will indicate how much of its accounts
receivable is past due. It also reports how far past due the accounts are.
With the click of a mouse, most accounting software will provide the aging of accounts receivable report. For
example, Gem Merchandise Co.'s software looks at each of its customer's accounts receivable activity and
compares the date of each unpaid sales invoice to the date of the report. If we assume the report is dated August
31 and that Gem's credit terms are net 30 days, any unpaid sales invoices with an August date will be classified
as current. Any unpaid invoices with a date in July are classified as 1 - 30 days past due. Any unpaid invoices
with a date of June are classified as 31 - 60 days past due, and so on. The sorted information is present in a
report that looks similar to the following:

If a customer realizes that one of its suppliers is lax about collecting its account receivable on time, it may take
advantage by further postponing payment in order to pay more demanding suppliers on time. This puts the seller
at risk since an older, unpaid accounts receivable is more likely to end up as a credit loss. The aging of accounts
receivable report helps management monitor and collect the accounts receivable in a more timely manner.

4.9.7 Aging Used in Calculating the Allowance

The aging of accounts receivable can also be used to estimate the credit balance needed in a company's
Allowance for Doubtful Accounts. For example, based on past experience, a company might make the
assumption that accounts not past due have a 99% probability of being collected in full. Accounts that are 1-30
days past due have a 97% probability of being collected in full, and the accounts 31-60 days past due have a
90% probability. The company estimates that accounts more than 60 days past due have being collected. With
these probabilities of collection, the probability of not collecting is 1%, 3%, 10%, and 40% respectively.
If we multiply the totals from the aging of accounts receivable report by the probabilities of not collecting, we
only a 60% chance of
arrive at the expected amount of uncollectible receivables. This is illustrated below:

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This computation estimates the balance needed for Allowance for Doubtful Accounts at August 31 to be a credit
balance of ₹8,585.

4.9.8 Mailing Statements to Customers

To improve the probability of collection (and avoid bad debts expense) many sellers prepare and mail monthly
statements to all customers that have accounts receivable balances. If worded skillfully, the seller can use the
statement to say "thank you for your continued business" while at the same time "reminding" the customer that
receivables are being monitored and payment is expected. To further prompt customers to pay in a timely
manner, the statement may indicate that past due accounts are assessed interest at an annual rate of 18% (1.5%
per month). Because transactions are usually itemized on the statement, some customers use the statement as a
means to compare its records with those of the seller.

4.9.9 Pledging or Selling Accounts Receivable

A company's accounts receivable are considered to be a type of asset, and as such can be pledged as collateral
for a loan. Asset-based lenders will often lend a company an amount equal to 80% of the value of its accounts
receivable.
Some companies sell their accounts receivable to a factor. A factor buys the accounts receivables at a discount
and then goes about the business of collecting and keeping the money owed through the receivables. Sometimes
the factor will purchase the accounts receivables with recourse. This means the company that sold the
receivables remains financially responsible if a customer does not remit the full amount to the factor. When the
factor purchases the receivables without recourse, the company selling the receivables is not responsible for
unpaid amounts.

Accounts Receivable Ratios

There are two commonly used financial ratios that address the relationship between the amount of a company's
accounts receivable as reported on the balance sheet and the amount of credit sales as reported on the income
statement. These ratios are:
1. Accounts receivable turnover ratio, and
2. Days sales in accounts receivable.

Direct Write-off Method

Generally accepted accounting principles (GAAP) require that companies use the allowance method when
preparing financial statements. The use of the allowance method is not permitted, however, for purposes of
reporting income taxes in the United States because the Internal Revenue Service (IRS) does not allow
companies to anticipate these credit losses. As a result, companies must use the direct write-off method for
income tax reporting.
In the direct write-off method, a company will not use an allowance account to reduce its Accounts Receivable.
Accounts Receivable is only reduced if and when a company knows with certainty that a specific amount will
not be collected from a specific customer.
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For example, let's assume that on October 21, Gem Merchandise Co. is convinced that a specific customer's
account receivable originating on June 5 in the amount of ₹1,238 is definitely uncollectible. Using the direct
write-off method, the following entry is made:

Usually many months will pass between the time of the sale on credit and the time that the seller knows with
certainty that a customer is not going to pay. It is difficult to adhere to the matching principle and the concept of
conservatism when a significant amount of time elapses between the time of the sales revenues and the time that
the bad debts expense is reported. This is why, for purposes of financial reporting (not tax reporting), companies
should use the allowance method rather than the direct write-off method.

In Fairfield by Marriott They are Using “OPERA”.

Preparing Invoice

Bills sending for Vendors

 Preparing Cover page

 Attached folios

 Attached the restaurant checks

 Po order

 Confirmation mail

Follow-up

Credit card reconciliation

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 UNIT-5

INCOME AUDIT

Definition: An income auditor is an accountant who documents all revenue that a business receives. He
maintains records that are used by other departments to perform required financial procedures, including tax
preparation and profit-and-loss analysis. In addition, an auditor safeguards an organization against monetary theft.

5.1Checklist for a Revenue Audit

Purchases and Expenses

Any business purchase should be accompanied by a receipt in the form of credit card slips, paid invoices,
canceled checks and cash register slips. An expense is a purchase your business makes that is not resold as a
good or service, such as office furniture or computers. Keep all these receipts in a place where you can access
them immediately.00:0000:00

Bank Account Statements

Bank account statements for the fiscal tax year should be filed with your gross receipts, purchases and
expenses. The statements back up what the business paid out and took in for the tax year. A fiscal tax year is
12 consecutive months that end on the last day of any month other than December.

Gross Receipts
Gross receipts are derived from the sale of your goods or services. These include your cash register tapes,
bank deposit slips, receipt books, invoices, credit card receipt slips and any 1099-MISC's you have paid out to
freelance contractors. Keeping these documents are necessary to help you file your taxes later to show income
for your business. Acceptable alternatives for the Internal Revenue Service (IRS) during an audit if you do
not have a receipt, such as a cancelled check, is a financial institution statement with the check number, check
amount, the payee's name and the date the amount was posted by the financial institution. If the payment was
made by an electronic funds transfer (EBT), the statement must show the payee name, amount and the date
the amount was transferred by your financial institution. For credit cards, the statement should show the
amount charged, payee name and date the transaction was processed.

Payroll Tax Return

The amount you have paid out to your employees as checks or direct deposits will also be required. The
payroll tax return should include any federal and local taxes as well as an accounting of any retirement
account withholdings. Employee payroll taxes should be kept at least four years, which is the required length
of time by the IRS.

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Record Keeping
Record keeping suggested by the IRS includes keeping a business checkbook, a daily and monthly summary
of your cash receipts, a log or journal of any check disbursements, any employee compensations and a
depreciation worksheet. Another IRS tip is to keep your business checkbook separate from your personal
checkbook. This is done to keep personal expenses separate from business expenses. Keep all the records f or
your business at least the minimum amount required by the IRS and all your previously filed tax returns.

Employees
Keeping a record of all of your employees, both past and present, with their Social Security numbers, contact
information and their I-9 and W-4 forms is a requirement by the IRS. The I-9 form verifies that the employee
is legally able to work in the United States. The W-4 form is filled out for the Employee's Withholding
Allowance Certificate, which allows you to estimate how much to withhold from the employee's wages from
the chart on the form.

5.2 Differences in Modified Vs. Accrual Accounting

The purchase of checks is an allowable business expense. You must use the checks in the ordinary course of
your business. These check expenses are deducted from revenue when you are calculating the profits of your
business. You need proper documentation for all allowable business expenses.

Determine the cost of your checks. The allowable expense is the actual cost of the checks plus any design
fees, shipping or handling charges.

Obtain a receipt for all expenses. The receipt should state the vendor name, date, amount and description of
the purchase. Expenses are recorded on the date they are incurred. If you purchase the checks and are liable
for payment of a purchase in November, but do not receive the checks until December, you record that
expense in November.

Record the amount in your accounting software or general ledger. For a purchase that is paid in full, record a
journal entry of a debit to your expense account and a credit to cash. If the purchase is to be paid in the future,
record a journal entry of a debit to your expense account and a credit to your accounts-payable account.

5.3 BUSINESS OPERATIONS

How to Identify a Merchant Account Number

How to Get an Itemized Statement From a Bank That Lists What You
If you are a merchant and you accept credit cards, debit cards, ATM cards, gift cards or any other form of
electronic payment, your merchant services company has assigned you a merchant account number. This
account number is associated with your bank account, and all plastic payments are routed through your
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merchant account until you "batch out," directing the merchant services bank to deposit the money into your
business account.

Find your merchant account number

Check your terminal. Your merchant services account representative may have written or printed your
merchant account number on a sticker and placed it on your credit card terminal itself.

Check your statements. You should receive a merchant account statement every month from your merchant
services provider. Your merchant account number should be clearly listed on your statement.

Call your representative. Your sales representative can help act as a go-between between you and your
company and help you find your merchant account number from their records.

5.4 How to Expense Ordering Checks

Keeping the proper paperwork to help your business run smoothly may help you avoid a revenue audit at the
end of the year. If you do face a revenue audit though, the properly filed paperwork can make the process
easier. Keeping all your receipts for purchases, expenses, donations and bank account statements along with
any tax extensions filed can help you with the audit process.

5.5 The Penalties for Creating a False W-2

Tax Implications of Taking No Income Tax Withholding From Salary

The Internal Revenue Service requires employers to provide employees with accurate copies of their W2
forms, showing the employee’s earnings and taxes withheld for the year. An employer who distributes forms
with false information -- such as an incorrect employee tax identification number, or incorrect reporting of
wages paid or taxes withheld -- is subject to financial penalties. You may file a corrected W-2 to correct any
errors.

Penalties
If you file a W-2 with incorrect information, the IRS may assess a penalty of ₹30 per incorrect form, up to a
total of ₹250,000, if you correct your errors within 30 days of the filing deadline. If you issue a corrected
form more than 30 days after the due date but prior to August 1, the penalty is ₹60 per form, up to ₹500,000
total. If you make the correction after August 1 or fail to issue a corrected form at all, the penalty is ₹100 per
form, up to ₹1.5 million.

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Exceptions
The IRS may waive penalties if you can show the error was made due to circumstances beyond your control.
You’ll also need to show that you made your best effort and did whatever you could to avoid errors. The IRS
also won’t assess a penalty if it deems any errors on your W-2 forms to be inconsequential. If an error doesn’t
prevent the IRS from processing the form correctly, and if the employee surname, tax identification or S ocial
Security number and any money amounts listed are correct, you probably won’t face a penalty.

5.6 Basic Bookkeeping for the Self-Employed

Self-employed people should have a basic understanding of their bookkeeping needs, even if they have an
accountant who does their taxes. By understanding bookkeeping procedures, the self-employed person can be
sure to save the correct information and make it easier to produce accurate books at the end of the year.

Software
Use bookkeeping software even if you do not prepare your own taxes, according to financial expert Elizabeth
Wasserman, writing on the Inc.com website. Bookkeeping software will help you to remember what types of
records you need to keep, and it will also help you to develop a running log of your income and expenses.
This will prevent mistakes made by trying to remember income and expenses at the end of the year. You can
also generate more detailed reports for your accountant, which will decrease the amount of time he has to
spend preparing your books, lowering your bill.

Receipts
Keep receipts from every purchase you make and every activity that you pay for while doing business. Keep
every meal receipt from business lunches, the dry cleaning receipts for your suits and the hotel receipts from
business trips. Purchase an expandable file folder where you can keep your receipts organized. Organize your
receipts by function to make them easier to catalog. For example, meal and concert ticket receipts for
entertaining clients can be filed under the "entertainment" tab in your expandable file folder.

Logs
Keep logs of the things that you do for business but cannot get a receipt for. The most common of these kinds
of expenses is travel mileage. Any time that you use your personal vehicle for business purposes you are
entitled to a tax write-off for each mile. Create expense forms and fill them out in great detail to help catalog
your expenses that cannot be backed up by receipts, sign them when the expense is completed and file the
forms in your expandable file folder.

Separate
Maintain separate bank accounts, credit-ard accounts and any other kind of business services from your
personal accounts. When the year is done, it is easier to track your business activity and keep your books
balanced when you already have your personal expenses separated from your business ones. Keep all of your

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business statements and account invoices from each month and file them away as backups to your receipts.

5.7 How to File Payroll Taxes

How to Calculate Payroll Expenses

Businesses with employees are required by the federal government to withhold federal income, Social
Security and Medicare taxes from each employee’s paycheck. Businesses must also contribute or “match”
Medicare and Social Security tax amounts based upon each employee’s wages. After separating payroll tax
from an employee’s actual wages, a check is issued to the employee for the net wage amoun t and the payroll
tax withholding is deposited with a federal tax depository. In addition to depositing payroll tax, most
businesses must also file quarterly payroll tax statements with the Internal Revenue Service.

Determine the payroll tax amounts that must be withheld from each of your employees’ wages. Depending on
the amount of wages or salary, each employee will be responsible for paying a specific income, Medicare,
and Social Security tax which is determined by multiplying the employee’s wages by the tax rate that
corresponds to their income level. Additional information on tax brackets, rates and withholdings is available
in “IRS Publication 15, Employer’s Tax Guide” which can be found on the Internal Revenue Service’s
website.

Deposit payroll withholdings with a qualified federal tax depository. Payroll deposits can be made
electronically through the “Electronic Federal Tax Payment System (EFTPS)” or by mailing or delivering
your payment to an authorize bank using IRS Form 8109-B. Information regarding the EFTPS systems and
IRS deposit forms are located on the IRS website.

Complete and file “IRS Form 941, Employer’s Quarterly Federal Tax Return.” This form is for businesses
that must pay ₹1,000 or more in employment tax each year. Most businesses will fall into this category.
Business with less that ₹1,000 in employment tax obligations may use “IRS Form 944, Employers’ Annual
Federal Tax Return.” Both forms will require information regarding the number of employees that your
business maintains and the amount of withholding deposits that the business has made over the course of the
year or quarter.

Prepare and file W-2 statements on behalf of each employee at the end of each fiscal year, or before January
31. Employers should use “IRS Form W-2, Wage and Tax Statement” to record the total wages paid to the
employee and total withholdings over the course of year. A copy of this form must be provided to both the
employee and the Social Security Administration before the January 31 deadline.

5.8 Does a Business Expense Reimbursement Count as Income?

What Is the Definition of an Expense Report?

A business expense reimbursement occurs when the employer refunds business expenses initially paid by
employees. In many cases, this applies when an employee spends money on a business trip. Examples of
typical business expenses include necessities such as food, lodging and transportation. According to IRS

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code, a business expense reimbursement can sometimes count as income.

Policies
Many companies have expense reimbursement policies that set a maximum daily expense reimbursement per
employee. The IRS considers those maximum allowance amounts for lodging, meals and transportation a per
diem amount. Should the employee spend more than this per diem amount, the employee will normally have
to pay that extra expense out of pocket since a company will not reimburse expenses above this maximum
amount.

Receipts
Usually, businesses require employees to turn in expense reimbursement receipts shortly after incurring the
expense. This allows the company to maintain up-to-date bookkeeping and tax reporting regarding employee
expense reimbursement. Many companies have specific policies that specify an exact time frame for turning
in receipts, such as one week or one month. Many companies also require employees to file an expense report
using a specific style or template. This expense spreadsheet details how the employee incurred expenses, the
amount of the expenses and the reason for each expense.

Additional Income
The IRS requires employers to maintain proof of reimbursement expenses deducted on company tax returns.
If the employee receives expense reimbursement from the employer and cannot provide receipts or other
documentation to back up the reimbursement, the IRS will consider the reimbursement taxable income for the
employee. Unsubstantiated reimbursements can also cause the IRS to disallow deducted expenses from the
employer’s tax return. Unsubstantiated reimbursements should appear as taxable income paid by the
employer on the employee’s W-2 Form.

No Income Tax
Before incurring a business expense, many companies want employees to receive pre-authorization for the
future expenses. Even though this pre-authorization represents an estimate of expected expenses, this process
can help an employee to manage expenses. The money employers pay employees as reimbursement for
substantiated business expenses is not subject to employment tax or income tax.

5.9 Petty Cash Audit Testing Procedures

Petty Cash Procedures

Businesses that maintain petty cash to pay for small, on-demand necessities should implement proper petty
cash audit testing procedures to ensure that employees use petty cash for appropriate reasons and properly
account for the petty cash as used. Whenever possible, an individual who does not have access to the petty
cash should be the person responsible for auditing petty cash.

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Timing of Audits
Petty cash audits should be conducted randomly and without notice to other employees. Without random
audits, employees who are “borrowing” from petty cash for personal reasons have time to put the money back
in place before you audit the funds.

Total the Contents

Balancing the petty cash in the box or drawer is the first step in auditing. The total of all petty cash plus the
receipts for items petty cash was used to pay for should equal the total amount of petty cash held for use. For
example, if you maintain ₹500 in petty cash and have ₹150 in receipts for petty cash expenses, you should
have ₹350 in cash remaining in the drawer. Unaccounted for money or receipts should be noted in an audit
report, and all employees with access to petty cash should be questioned about the difference.

Review the Receipts

Every receipt should clearly explain the item(s) purchased. If the item(s) purchased is not clear from the
receipt itself, the item(s) should be noted in writing on the receipt along with any explanation necessary for
the expense. Each item purchased should represent an appropriate use of petty cash funds and be approved by
a manager or supervisor, as set forth in your company policies. Any inappropriate use of petty cash, such as
for personal items, should be noted in your report. Any use of petty cash to cover normal operating expenses
should be noted in your report and explained by the employees so that you can determine if changes should
be made to operating procedures to cover those costs another way.

Review the General Ledger

Every petty cash expense should be properly reflected on the accounting general ledger. Check the receipts
for the explanation of the expense, and verify that the expense was posted to the proper general ledger
expense account.

Verify the Items Purchased

Whenever possible, you should ask to see the item(s) purchased with petty cash, especially in the case of non -
consumable goods. If employees used petty cash to purchase small equipment or other non-consumable
necessities, the employees should be able to show you the location of the item(s).

5.9.1 TAXES

Where to Get W-2 Forms

Difference Between W-2 & W-3 Forms

Employers are required annually to complete a Form W-2, Wage and Tax Statement, for each employee. This
shows the amount the employee was paid and taxes that were withheld. The W-2 must be filed with the Social
Security Administration and a copy provided to each employee. If you need to file W-2 forms and are not
using a payroll or accounting service, you must obtain blank forms and fill them out manually.
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Sources for W-2 Forms
The ideal source for W-2 forms is the IRS, since you are sure to get the most up-to-date version and they're
free. Order by telephone at 1-800-TAX-FORM; order early to ensure timely delivery, since the IRS often gets
back-ordered near the end of the year. You can order up to 1,000 copies. Many office supply stores also carry
W-2 forms for purchase.

Make Copies
Make sure the W-2 forms allow for at least six copies. Copy A, the red copy, goes to the SSA along with a
Form W-3. Copies B, C and 2 go to the employee. Copy 1 is for the state, city or local tax office. Copy D is
for the employer's records.

5.9.2 What Is an Expense Statement?

What Is the Definition of an Expense Report?

Expense statements provide a way for employees to itemize expenses when requesting reimbursement from
an employer. Though expense statements provide benefits for employers and businesses alike, many
organizations encourage employees to exercise discretion when spending money.

Definition
An expense statement, according to a quick guide provided by the University of Maryland, is a detail of
financial transactions itemizing expenses. Businesses typically use expense statements to reimburse
employees who spend personal funds while traveling for business.

Benefits
An expense statement allows employees to quickly and accurately request reimbursement for expenses
incurred during company business. From a business perspective, expense statements ensure the organizati on
does not reimburse employees for non-reimbursable expenses or overpay during the reimbursement process.

Policies
Many companies provide expense statement policies that guide employee expenditures and reimbursement
requests. According to the human resources website, Employee-Handbook, expense statement policies set
some guidelines, but organizations must encourage individual employees to use discretion when making
purchases.

5.9.3A List of the Four Accounting Principles

How to Prepare Journal Entries for Accounting

Though accounting for income and expenses in a business environment is a complex process, the basics of
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accounting are relatively simple. A system known as the Generally Accepted Accounting Principles defines
four basic assumptions, four basic principles and four basic constraints to business accounting. The four basic
principles of GAAP deal with the way that money flows into and out of the business as well as the way that
this flow is documented.

Cost Principle
The cost principle states that the actual cost of assets must be recorded instead of recording the cost based on
market value or inflation adjustment. This ensures that the recorded cost of inventory and other purchases is
reflected accurately in the accounting ledger. The principle is sometimes referred to as the "historical cost
principle" because costs are recorded based on the actual cost at the time of purchase instead of being an
estimated or adjusted cost recorded at a later time.

Revenue Principle
The revenue principle states that revenue should be recorded at the time that it is earned, not at the time when
payment is received. This prevents errors in accounting caused by delayed payments since any money still
owed to the company is evident within the accounting ledger. The revenue principle also serves as the basis
for the accrual accounting method, causing it to occasionally be referred to as the "accrual principle."

Matching Principle
The matching principle states that expenses should be matched to the revenue they are related to. The
expenses are not recorded at the time they are generated, but instead are recorded once they make a
contribution to revenue. This allows the profitability of goods and services to be easily evaluated and also
illustrates the connection between expense and income, since products and services are directly matched with
the revenue they generate. Some expenses such as administrative costs and employee salaries cannot be
directly linked with revenue, of course; these expenses are recorded simply as expenses for the current period.

Disclosure Principle
The disclosure principle states that all of the financial information disclosed by a business should be released
in a form that is easy to understand and that this disclosure should be balanced against the cost of compiling
and releasing the information. Any information needed to understand financial statements should be included
in the body of the statements, in footnotes or in supplemental documents that are provided alongside the
statements. The amount of information disclosed should be sufficient for corporate executives to make
decisions regarding the company; unnecessary information should be streamlined to keep the cost of
producing the statements down.

5.9.4 How to Do an Account Reconciliation

How to Reconcile a Bank Statement to the General Ledger

Performing account reconciliations is a tedious task for most small-business owners, but a necessary task
nonetheless. When you perform account reconciliations, the goal is to ensure all transactions you process
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through your business bank account are properly accounted for. You reconcile, or match, the items on your
bank statement to items you record in your company books. Once you reconcile your accounts, the adjusted
statement balance and adjusted book balance should match. The reconciliation process creates a paper trail
and is helpful in explaining income and expenses, or providing evidence in the event of an external or internal
audit. Account reconciliations are typically performed on a monthly basis.

Statement Balance
Look at the ending balance on your bank statement.

Total any deposits you have made between the date the statement ends and the date you perform the
reconciliation. Add the deposit total to your ending bank statement balance.

Total any outstanding checks that have been issued but have not cleared the bank between the ending
statement date and the reconciliation date. Subtract the total outstanding checks from the ending statement
balance. The result is your adjusted statement balance.

Add or subtract any bank errors, if applicable. If your bank posts an erroneous transaction to your account
between the statement and reconciliation dates, adjust your ending statement balance accordingly. For
example, if your bank posts a deposit that is an incorrect amount, add or subtract the difference from your
adjusted statement balance.

Book Balance
Look at the balance recorded in your checking account register or books on the date of reconciliation.

Deduct bank fees that appear on your bank statement but have not been recorded in your books, such as non -
sufficient funds (NSF) fees, check printing fees and services charges.

Add interest the bank deposits to your account at the end of the statement cycle if you have not recorded the
deposit on the books. The interest you earn is shown on your bank statement.

Add or subtract any miscellaneous items shown on your bank statement but not reflected on the books.
Review transactions on the bank statement. If deposits or withdrawals recorded on the statement are not
shown on the books, adjust accordingly. The result is your adjusted book balance. Verify that your adjusted
statement and book balances match. If they do not, you must perform the reconciliation again. If the figures
match, your account is reconciled.

5.9.5 DOCUMENTS FOR YOUR BUSINESS

How to Keep Your Rental Property Paperwork Organized

How to Write a Receipt for Rent

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Whether you own one rental property or several, it's important to keep all the paperwork associated with the
properties organized. You need easy access to leases and any addenda to them if tenant questions arise, and
you should keep all rental applications in case a denied applicant makes a future claim agai nst you. In
addition, and perhaps most importantly, you can deduct expenses on your income tax only when you can
prove them through your records. Paperwork needed for taxes is the most challenging to keep organized
because there is so much of it.

What You Should Keep

Always keep a copy of the lease, any addenda to the lease and all rental applications from prospective tenants
in a safe place. A good idea is to create a file for each rental property. Keep the files in a filing cabinet. You
also need proof regarding whether you made or lost money on the rental property each year and how much.
You do that by listing your rental income and subtracting the expenses. Canceled checks, bank statements
that show direct deposit or receipts you write if you accept cash all prove rental income. Your receipts from
anything you spend on the house for repairs, insurance, taxes and anything else, such as termite and trash
service, serve as proof of your expenses. You need to keep separate income and expense records for each
rental property you own.

Paper Trail
There's nothing wrong with keeping records the old-fashioned way by writing down your income and
expenses in a notebook or ledger and keeping the income paperwork and expense receipts in a storage box or
in a compartment in your notebook. This method is acceptable to the Internal Revenue Service, according to
legal advice website Nolo. It's a good idea to note on the receipt what it was for if this information isn't
already on the receipt. The paper method can be the simplest way of keeping records, especially if that's how
you've always done things. Simply list an income column and an expense column for each month to see how
you fare at the end of the year. Divide expenses you might pay once a year, such as property tax, by 12 to get
a true monthly account.

Electronic Methods
Many computer software programs are available to help with your record-keeping. Spreadsheet software,
such as Microsoft Excel, Lotus 1-2-3 and Ability Office, can keep track of your income and expenses. You
would create a separate spreadsheet for each rental property. But you would still need to keep paper copies of
your income and expense receipts in case the IRS audits you. The other options for keeping receipts are to use
an Internet storage service that you can upload your receipts to, such as Shoeboxed, or to use an at -home
version, such as NeatReceipts, to keep digital receipts at your home. Once a month, look at your income and
expense receipts, and enter the data on the spreadsheet.

Property Management Software

Landlords also can use property management software to keep rental property paperwork organized. Quicken,
for example, has software that organizes all the paperwork for you. It also helps find all your tax deductions,
gives you a place to record late fees or partial payments and lets you compare the statuses of your rental
properties. Property management software typically has many advanced features that landlords with one or
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two properties might not need. Landlords with more than 10 properties often find them useful, according to
Nolo.

5.9.6 SALES

Net Receipts vs. Gross Receipts

In accounting, gross refers to amounts before deductions and net refers to gross amounts minus deductions. In
the context of gross and net receipts, the deductions are for sales discounts, returns and allowances. Company
management may use the gross receipts to assess the effectiveness of its sales and marketing strategy, while
using the net receipts to analyze whether and why deductions from gross receipts are different from historical
norms. People often use the terms receipts, sales and revenues interchangeably.

Gross Receipts
The Internal Revenue Service defines gross receipts as the total amounts a company receives from all sources
during its annual accounting period, without subtracting any costs or expenses. The accounting entries are to
debit (increase) cash and credit (increase) sales for cash transactions, and debit (increase) accounts receivable
and credit sales for credit transactions. The IRS recommends business owners ensure that sales records match
the actual cash and credit receipts at the end of the day. Cash registers, software spreadsheet applications and
proper invoicing systems are some of the ways to maintain complete records.

Deductions
The deductions from gross receipts include returns, allowances and sales discounts. Customers often retu rn
damaged, defective or otherwise unusable products. Sometimes a customer gets to keep a defective product in
return for an allowance or reduction in the selling price. The accounting entries are to debit (increase) sales
returns and allowances and credit (decrease) cash or accounts receivable. Companies may track the returns
and allowances amounts separately.

Some companies offer cash discounts to customers for settling their invoices early. The accounting entry is to
debit (increase) sales discounts by the amount of the discount. Sales returns and allowances and sales
discounts are contra revenue accounts because they reduce the gross sales amounts.

Net Receipts
Net receipts are equal to gross receipts minus returns, allowances and discounts. The income statement shows
the net receipts or net sales amount as a separate line item. For example, if a company has ₹1 million in gross
sales and ₹100,000 in total sales returns, allowances and discounts, the net sales are ₹1 million minus
₹100,000, or ₹900,000.

Tax Tips: Gross Profits

The IRS recommends small businesses figure the gross profit by first calculating net receipts by deducting the
returns and allowances from the gross receipts. The gross profit for a merchandise business is equal to the net
receipts minus the cost of goods sold. Service businesses that do not manufacture or resell products may
figure the gross profits directly from the net receipts.
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5.9.7 TAXES

How to Find My Federal ID Number

Your federal ID number, or EIN, identifies your business in the same way a Social Security number identifies
a person. You need this number to conduct routine business activities, such as open bank accounts, apply for
credit, file tax returns, pay employees and apply for licenses. When you misplace your EIN, you can check
several sources to find out what it is.

Check Your Tax Returns

When you file income or employment tax returns, your EIN is listed on the forms. Check any return
previously filed by your business, and look for the spot where your business information is listed. Your EIN
is located near the name and address of your company.

Check IRS Correspondence

When you apply for an EIN, the IRS issues a letter that contains the number. However, if you've misplaced
that letter, most IRS correspondence sent to your business also shows your company's EIN. Look for any IRS
notices, bills or general correspondence. Your EIN may be near the top where your company's information
appears, or included on any "response vouchers" attached to the letter.

Ask Someone Who Handles Your Finances

If the thought of digging through paperwork sounds more tedious than you prefer, check with someone who
handles your company's finances, such as your accountant or banker. These professionals use your business
EIN to file tax returns and other documents, as well as maintain bank records. Your EIN is attached to these
activities, so these professionals have access to the information you need.

Call the IRS

The IRS can also provide you with your EIN. Call the IRS Business and Specialty Tax Line, at 800-829-
4933 Monday through Friday from 7 a.m. to 7 p.m. local time. The IRS will ask some verification questions
to ensure you're an authorized representative of the company before providing the EIN. Owners, officers and
members listed on IRS records for the business are automatically authorized to receive this information after
verification questions are answered successfully.

In Fairfield by Marriott They are Using “MICROS”.

Preparing Management reports

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 UNIT-6

Hotel Store and Purchase

Definition:

Food control begins when the orders are placed; it ends when the ultimate cash takings are banked. Store and
purchase plays a vital role in this process and helps generating more revenue and controlling food cost.
The store should be close to the preparation area. Basic aim is a smooth flow from stores to preparation, to
cooking, to server and from the server to the restaurant and then back to the wash up, so there is need to provide
storage appropriate to the size of the kitchen.

6.1 Functions of Store and Purchase:

The functions of the stores is to receive, check, store correctly, issue goods as required against requisition
properly authorized. Strict control should be exercised as it provided cost figures and assist in future budgeting.
It is essential to check all incoming supplies for quality, weight and price. Supplies received should be promptly
taken into stock; non-perishables should go into dry stores. Perishable items be stored in cold rooms, freezers
etc. The ideal dry store temperature range is 15C to 18C.
Refrigerators for perishable foods are maintained at 1C to 4C.

Records should be kept to show the stock of each commodity received, issued and on hand with dates of receipt
and issue, so that at any time the management can check the accuracy of the record.

The stock should be taken at least once a month. The best system of accounting is a card index comprising a
separate card for each commodity and all issues supported by relevant documents. The system is amenable to
periodic spot checks as required.

6.2 PORTION CONTROL FOR STORE AND PURCHASE

“Portion control” means the amount of size of a portion of food to be served to a customer.

Food costing and portion control are implementer and the need for this form of control comes from both sides of
the business from the caterer and his customers. There is a natural tendency for clients to eye one another’s portion
when they are served and if one is thought to be slightly larger than the others there is apt to be resentment and a
reaction cletrimental to the good name of the establishment. Only exact portion control can eliminate this. It is
not something that can be introduced at the service point; it must start when orders are placed for supplies.

Monitoring portion control could be done by direct supervision by sales analysis and by comparing the
requisitions of cash department with issues.

Purpose of portion control in Store and Purchase:

1. To ensure fair portion for each customer.

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 2. To see that each department utilizes purchases to the full
3. To control waste
4. To ensure that standard costing is an accurate as possible.

6.3 Methods of monitoring portion control in Store and Purchase:

1. Ordering the right quantity and supervising when receiving it.
2. Even preparing the food in the production area under direct supervision.
3. by proper checking of the service of food.
4. Comparing the requisitions of each department with issues.
5. by sales analysis.

6.4 Aids to portion control:-

Portion control is done by using equipment and utensils as for example a scoop (ladle) used mainly for ice-cream
can also be used for mashed potatoes as a portioned for mixture at Store and Purchase.

(a) Automatic portion control equipment’s used in Store and Purchase include:

1. Tea dispensers
2. Butter pat machines
3. Bread slicing and buttering machines
4. Gravity feed slicers
5. Coffee-making, e.g. cone machines
6. Mini steak mounding machines
7. Milk dispensers

(b) Utensil used in Store and Purchase for portion control include-

1. Ladles
2. dariole moulds
3. Serving spoons and scoops
4. Pie dishes
5. Woven wire servers
6. Baking tins
7. Measures

(c) Serving dishes that help in portion control at Store and Purchase

1. Glasses
2. casseroles
3. Coupes
4. tureens
5. Sundae glasses
6. Sauce-boats
7. Soufflé cases
8. Vegetable dishes
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 9. Cocottes’
10. entrée dishes

Portion sizes and Store and Purchase:

As portion sizes vary from one establishment to another between table ’hôte and a’la carte service, it is difficult to give
definite average portion sizes.

6.5 Losses in preparation:-

The percentage of waste of vegetables in preparation will be according to the kind and the quality used. To compute
portion control and cost, the waste from peeling and trimming and also the shrinkage in cooking must be considered.
If there are unskilled workers, there will be a tremendous waste and a high food cost. They should be trained to judge
quality merchandise in order to be able to appreciate its value.

3. Visual aid sheets:-

A portion control sheet can be used for costing various items of food or complete dishes. The object is to
ascertain the total yield of a given commodity after preparation and processing.Such a sheet can be used in the
experimental or research kitchen of a catering group or in the food preparation area when compiling standardized
recipes by Store and Purchase.

4. Standardized recipes:-

They assist in food coasting and portion control by taking the guess work away and substituting more exact
approach, by listing the ingredients and methods in a readily understood form as the result will be uniform
every time it its featured. The food cost can also be known in advance if a price column is introduced provided
it is kept up to date with any price changes. The standard recipe will give a warning when the price charged
becomes uneconomical and an increase becomes necessary.

6.6 The effects of irregular or badly administered portion control in Store

and Purchase:-
Following effects will emerge:

(a) Dissatisfied customers resulting in a decrease of business.

(b) Food costing will be inaccurate, affecting profits.

(c) A lack of sense of responsibility among personal leading to a loss of standard.

Portion control in the hotel Store and Purchase is one of the greatest factors that contribute to a successful
business. The general rule should be a fair portion for a fair price.

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Quantity control and Store and Purchase :- The control of quantity consumed ensures that everything consumed
has been accounted for. It does not ensure profitability, but provides a useful supplementary check and is simple
to operate. For simple dishes, this method is good but not for complex dishes. For small establishments when one
store keeper is responsible and issues one egg and two bacon rashers for breakfast, it controls consumption.

6.7 PURCHASING:-
Buying quality and freshness of supplies and portion control are of the utmost importance for the operation of a
successful business.

Large establishments will often employ a purchase Manager, as he can concentrate and get the best supplies.
Requisition for supplies are placed with the store/kitchen stewarding dept.at a specified time in advance by the
chef de cuisine for highly perishable supplies. The store keeper will forward his requisitions for “Dry stores” and
cleaning materials in the same manner.

Suppliers should be changed from time to time.

Knowledge of buying is very essential. The Store and Purchase should have a reasonable technical knowledge in
catering as he will be able to follow the requisitions properly and understand the importance of delivery times,
quality and specifications etc. The Store and Purchase should assimilate information new ideas and techniques,
gathered from trade journals, visits to exhibitions and food processing plants. The comparison of competitive
price lists from suppliers must be done occasionally.

When selecting the suppliers following points should be considered by Store and Purchase :

(a) The prices are competitive for the goods specified in relation to quality.

(b) The goods offered should meet specifications by looks and other related factors. Samples should be taken for
checking.

(c) Financial terms offered relating to credit facilities and discount for settlement.

Selection will then be made of at least two suppliers for each ‘group’ of supplies required in certain ‘groups’
which include many commodities such as groceries. Three or even more suppliers may be selected. Where
supplies are obtained by contract, obviously this will not apply.

Specialized supplies such as pao bhajhi masala, Amritsciri papad, paprika, avocado pears, capers, artichokes etc.
May be obtained from a single supplier.

Instructions to suppliers:-

After the selection has been made of various suppliers, written instructions on the following points should be
made by Store and Purchase –

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 1. Delivery times and any special requirements of delivery.
2. The person or persons authorized to accept and sign for supplies.
3. That goods supplied are as ordered including special instruction to “brands and sizes”.
4. No alteration will be accepted between quoted and invoice prices.
5. The name of people authorized to order supplies. If there is a contract it will operate for a given period
often for one year. The purpose of “contract” buying is to obtain the best supplies possible at a fixed price
over stated period.

Ordering of supplies:- Orders for supplies, generally fall in 3 categories orders-

1. Daily orders,
2. Weekly orders
3. Standing orders.

Daily orders are usually placed for perishable through Store and Purchase, items such as meat poultry, game, fish,
fruit, vegetables, milk and cream, etc. The orders can be placed by telephone, confirmed by a written order.

Weekly orders consist mainly of dry stores, i.e. groceries etc. Standing orders certain types of supplies such as
milk, eggs, bacon etc. are ordered for a specific quantity. The quantity stated is the minimum requirement. If more
is needed, supplementary order is given.

6.8 Cycle of control in Store and Purchase

Purchasing:

Everything in a food operation actually beings with the kind of market that an operation would cater to. Menus
are planned on the basis of the market segment. Once the menus are planned, all the other requirements such as
buying of equipment and other things, planning and layout of the area are carried out. This function of buying is
classified as purchasing, and in hotels a separate department known as the purchase department carries out these
functions.
Material need to purchase against some standards and such standards are known as ‘specification’. These
specifications are made on the basis of the end product and how it is perceived to be served. Skillful purchasing
with good receiving and storage can play a major role in the bottom line of the establishment. It is often said that
one could produce low-quality food to a high-quality ingredients, but never can produce high-quality food from
substandard ingredient. These are the some factors or procedure that one has to be aware of before carrying out
the purchase functions. Once the right market is located, samples are procured from the supplier and then tests
such as for quality and quantity are done to narrow these down in a document known as Standard Purchase
Specification. Such format can differ from one establishment to another.

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Standard Purchase Specification format:

Receiving:

It is important to check whether the goods received are as per their specifications. Otherwise, the organization
might be paying more for substandard quality. It is important for chef to constantly check all the food products
and reject any item if is not as per the specification. The supplier is then given a time to procure the items as per
the specifications, or else hotel can buy the product from the open market charge the same to the supplier. The
items are received as per the food safety laws, and the temperature and the condition of packaging are given
utmost importance. Catering establishment such as airline and hospitals, have very strict receiving quality
standards to control quality and standardization. The next step after receiving goods is the proper storage of the
food.

Document used by receiving department for Store and Purchase:

The receiving department needs to maintain certain document in specific formats in order to help in the control
of goods received and rejected. The receiving department is usually in an area which is separate from the guest
area. The staff entrance into the hotel is also usually near the receiving area. The following are certain documents
that are used:

Gate Pass (Returnable):

The receiving department issues this document whenever hotel property is to be taken out from the hotel on a
returnable basis. This is mainly use by the department for outdoor functions. Four copies are made first copy goes
to security personnel at the gate, second copy goes to receiving department, third for the person who is taking the
item out of the hotel and fourth copy goes to user department for the record.

Gate Pass (Non-returnable):

This document use for any item leaving the hotel which will not be returned to the hotel. However any item
leaving the hotel premise which is not going to be returned required permission of general manager, upon which
the purchase manager finds a buyer and the gate pass issue by the receiving department. Same procedure follows
as returnable gate pass.

Memorandum Invoice:

This invoice is made when receiving department does not receive a proper bill for any item received. The details
of the item, quantity and supplier are entered in the invoice and kept as a record till the department receives a
proper bill. When the bill is received it is matched against the invoice for the item’s details, quantity and price.

Inspection Report:

This report is prepared in case the quality of imported item received by the department does not match the standard
specified for the unit. The item then has to be returned. A detailed explanation of why the item was rejected and
what conditions it was received needs to be given in the report. Four copies of report made; first copy goes to
purchasing department which then goes to supplier, second copy goes to the controls department, third copy is
left with receiving department and fourth copy is sent to the user department.

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Short Supply Report:

This report is made for perishable item only. Any shortages in the quantity received from the supplier due to any
miscommunication or all details of rejected items are recorded. The supplier is intimated about the shortage and
the quantity is adjusted n next delivery. This report is made in duplicate. One copy is sent to the executive chef
and another is left with the purchase department.

Storing:

Storage areas are the places in Store and Purchase that are designed to store the raw or cooked food before or
after the cooking or service operation. Storage of food items in any catering establishment is like saving money
in bank. So it is important to ensure that food items purchased with care and research are stored properly to
preserve their freshness.
It is mandatory to keep the store under clean and hygienic conditions, as commodities that would yield profits are
stored here for future use. If the conditions are not as per the food safety laws, then the store would be infested
with pests and rodent, which in turn would contaminate the food items. Thefts, spoilage’s infections through
pests, and non-accessibility of the products in the store are the four major concerns of any food storage
department.

Since the opening costs of the food and beverage department, such as food cost, are related with the issues from
the food stores, strict control systems have to b put in place for proper inventory control. Care has to be taken
while designing a storeroom for volume feeding. The following points must be considered while designing a
storeroom for bulk feeding:

 The storeroom’s proximity to the receiving department as well as to a central position for all user
departments should be kept in mind.
 The volume of business and the type of establishment also play a major role in the designing storeroom.
 It should be specious, free from pests and rodents, and low in humidity.
 It should easy of operation and easy of cleaning after goods have been stored.
 It should facilitate the monitoring of goods in store.
 It should have an optimum space utilization design and should have sufficient number of rack and shelves.
 The type of food store required- cold store and dry store –should also be considered.
 The storeroom design should aid proper stock rotation method
 The storeroom should have proper lightning and should be well ventilated.
 The variety or number of items to be store with their per stocks and the space required for them should
also considered
 The storeroom should be well illuminated as dark corner can be prone to past infection.
 The flooring should be durable and heavy duty, as this would be a heavy traffic area.
 The flow of work of operations would determine the style and design of the storeroom.
 The spacing between shelves and storage cabinets should be kept in mind, and the required space for them
needs to be available.
 All storage areas have to be kept clean and tidy all the times. Regular cleaning schedules need to be place
to keep the store room clean. Any spillages on the floor must immediately be cleaned as they invite pastes
and rodents.

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6.9 Inventory control in Store and Purchase:
Since the stored stocks are equivalent to tangible money, it is important that proper inventory control systems are
in place to keep a check on the stock in hand. The food cost of a kitchen is calculated on the basis of item
withdrawn from store. A simple formula to calculate the food cost would be:
FOOD COST PERCENTAGE = ITEM WITHDRAWN FROM FOOD STORE * 100/TOTAL FOOD SALES

We can thus, understand the importance of a food store and can imagine its impact in food cost. Any spoilages or
pilferages from the store are debited from the kitchens and hence chefs lay emphasis on proper control of this
area. The following processes are usually involved in inventory control:

Minimum and Maximum Per Stocks and their Calculation:

The inventory for the food and beverage store carried out once a month, while that for general store is carried
out quarterly. No items are issued to any department on the day of inventory. Per stock for each items in different
and is determined depending on the following factors:
 Turnover of items: Every item has a stock level, maximum or minimum inventory, as well as a recording
level. These can be checked from an item enquiry. Item enquiry is a part of software process through
which one can search for a particular item. The per stocks are set on the basis of their consumption pattern
six months or twelve months. A safety lock, also known as minimum level inventory, is maintained for
all items to be able to run operations under all possible conditions.
 Consumption of item: The higher the consumption, the more stock one needs to keep and vice versa. But
if an item is being ordered for a special function, then it needs to be communicated to the stores so that
adequate stock levels can be maintained.
 Lead time: the time is take for ordered goods to arrive at the store is known as lead time. It plays a very
crucial part in ordering and per stock levels. For example imported gods have to be ordered well in advance
as such goods need more time to reach from another country.

Distance from supplier:

The distances from supplier, as discussed for lead time, plays an important part in per stock levels. This is directly
related to lead time.

Re-ordering level:

This is the per stock level which when reached indicates that the item must be re-ordered. Different items have
different re-order levels depending upon the policy of the company and the needs of the user departments.

Slow & Nom-moving item:

Slow and non-moving are separated from the inventory at the end of the month and are displayed on racks. The
chef and food & beverage manager are requested to devise the methods of utilizing these item, as they were the
one who indented those item. If these item do not get to be used, then partial recoveries are made by disposing
them in the market.

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Space available in store:

One must decide on per stocks based on the storage space available in the area. Haphazard stocking would lead
to non-accessibility of the product, which will result in spoilages and loss of money.

6.9.1 The 10 Steps of the Procurement Cycle

Management in any company must understand the art of obtaining products and services. The procurement cycle
follows specific steps for identifying a requirement or need of the company through the final step of the award of
the product or contract. Responsible management of public and corporate funds is vital when handling this
necessary process, whether in strong or weak economic markets. Following a proven step-by-step technique will
help management successfully achieve its goals.
Step 1: Need Recognition
The business must know it needs a new product, whether from internal or external sources. The product may be
one that needs to be reordered, or it may be a new item for the company.
Step 2: Specific Need
The right product is critical for the company. Some industries have standards to help determine specifications.
Part numbers help identify these for some businesses. Other industries have no point of reference. The company
may have ordered the product in the past. If not, then the business must specify the necessary product by using
identifiers such as color or weight.
Step 3: Source Options
The business needs to determine where to obtain the product. The company might have an approved vendor list.
If not, the business will need to search for a supplier using purchase orders or research a variety of other sources
such as magazines, the Internet or sales representatives. The company will qualify the suppliers to determine the
best product for the business.
Step 4: Price and Terms
The business will investigate all relevant information to determine the best price and terms for the product. This
will depend on if the company needs commodities (readily available products) or specialized materials. Usually
the business will look into three suppliers before it makes a final decision.
Step 5: Purchase Order
The purchase order is used to buy materials between a buyer and seller. It specifically defines the price,
specifications and terms and conditions of the product or service and any additional obligations.
Step 6: Delivery
The purchase order must be delivered, usually by fax, mail, personally, email or other electronic means.
Sometimes the specific delivery method is specified in the purchasing documents. The recipient then
acknowledges receipt of the purchase order. Both parties keep a copy on file.
Step 7: Expediting
Expedition of the purchase order addresses the timeliness of the service or materials delivered. It becomes
especially important if there are any delays. The issues most often noted include payment dates, delivery times
and work completion.

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Step 8: Receipt and Inspection of Purchases
Once the sending company delivers the product, the recipient accepts or rejects the items. Acceptance of the
items obligates the company to pay for them.
Step 9: Invoice Approval and Payment
Three documents must match when an invoice requests payment - the invoice itself, the receiving document and
the original purchase order. The agreement of these documents provides confirmation from both the receiver
and supplier. Any discrepancies must be resolved before the recipient pays the bill. Usually, payment is made in
the form of cash, check, bank transfers, credit letters or other types of electronic transfers.
Step 10: Record Maintenance
In the case of audits, the company must maintain proper records. These include purchase records to verify any
tax information and purchase orders to confirm warranty information. Purchase records reference future purchases
as well.

6.9.2 Purchase Order Process Steps

Purchase orders (POs) play an important role in controlling business purchases. In this post, we’ll define what a
purchase order is, describe what information it includes, highlight key benefits to using POs, and explain the
key steps in the purchase order process.

What is a purchase order?

A purchase order is the official confirmation of an order. It is a document sent from a purchaser to a vendor that
authorizes a purchase.

What information does a purchase order include?

While some information may vary, purchase orders generally include the name of the company purchasing the
goods or services, date, the description and quantity of the goods or services, price, a mailing address, payment
information, invoice address, and a purchase order number

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Why do companies use purchase orders?

Purchase orders are used for several reasons:

They set clear expectations – Purchase orders enable purchasers to clarify their exact needs to vendors. Not
only does this help ensure that you get off on the right foot, but both parties can use it as a formal check in case
orders are not delivered as expected.

They help manage orders – Many businesses designate certain individuals to manage inventory, which
typically includes processing incoming orders. These individuals are typically in procurement, finance, or
operations. Purchase orders give these individuals official documentation of incoming or pending deliveries,
enabling them to track and manage orders more effectively.

They help with budgeting – Once a purchase order is created, purchasers can immediately factor these costs
into company budgets. Businesses benefit from having clear records of exactly how much money is being spent
and where it’s going.

They are legally binding – We are often asked whether a purchase order is legally binding. The answer is now
officially yes, per the 2014 court case, MidAtlantic International Inc. vs. AGC Flat Glass North America Inc. In
this case, a federal court determined that purchase orders are an enforceable contract between two parties. In the
absence of a formal contract, a purchase order can serve as a legally binding document only after it is accepted
by the vendor.

They are a key part of audit trails – Auditors are on the lookout for financial discrepancies. They’ll be
particularly interested in goods and services coming in and payments going out. Issuing, processing, and
recording purchase orders is a great way to keep auditors happy.
The benefits above are geared towards purchasers, but POs are important documents for vendors as well.
Vendors use them for order fulfillment and payment processing.

Do businesses always need purchase orders?

Whether businesses need purchase orders depends on several factors, but in general, it’s a good business
practice to keep things in order in accounts payable.
In today’s world, communication happens at the speed of light. Orders are made in passing over the phone, via
email, and even through texting. Foregoing formal confirmation of an order means that you or your vendor may
forget important order details.

Some institutions do not require a purchase order for certain items. We’ll illustrate using the requirements of a
small private university which are listed on its website. POs are not required for the following expenses:
Interdepartmental charges (bookstore, print room, etc.). These charges are billed monthly instead.
The reimbursement of travel expenses. A check request form is used instead.
The renewal of annual memberships and subscriptions. An expense reimbursement request is required instead.
Ordering office supplies online from the university’s designated supplier.

In all other cases, the university states clearly that they can refuse payment without authorized purchase
orders.

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6.9.3 What is the purchase order process?
The following are the steps in the purchase order process. Note that the purchase order process is one part of a
broader procurement process that includes everything from identifying the need for a good or service to
payment. Read our blog post on the entire procurement process here.

Step 1: Purchaser creates purchase requisition – The purchase order process starts with a purchase
requisition, a document that is created by the purchaser and submitted to the department that controls finances.
Consider this the part of the process where you get the thumbs up to purchase the goods and services you want.
You’re not actually ordering anything, you’re getting the approval to do so. Approvers can choose to approve,
reject, or flag your request for further discussion. The key difference between purchase requisitions and
purchase orders is that a purchase requisition is about permission and purchase orders are about purchasing.
Read our blog post on purchase requisitions vs. purchase orders for a detailed description of these two
documents.

Step 2: Purchaser issues purchase order – Once the purchasing or procurement department has approved the
purchase requisition, it issues a purchase order to the vendor. In essence, POs place the order. Purchase orders
are typically created using electronic purchasing systems like PurchaseControl, which enable businesses to track
POs and submit them electronically.

Step 3: Vendor approves, rejects, or submits PO for discussion – The vendor will review the purchase order
thoroughly, paying close attention to quantities, prices, total amount due, and terms and conditions. Once the
vendor approves the purchase order (usually via email or using an e-procurement software), they prepare the
goods or services to be delivered. If they do not have an item that is being purchased or if there are other
concerns with the order, it is flagged and sent back to the purchaser for further discussion.

Step 4: Purchaser records purchase order – The final step in the purchase order process consists of the
purchaser recording the PO. As mentioned earlier, filing purchase orders is a good habit in case of an audit.
Once these steps in the purchase order process are complete, the goods or services are delivered and inspected.
Thereafter, the vendor issues an invoice to the purchaser, payment is made, and the transaction is complete.
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How is a purchase order different from an invoice?

While they may seem similar, purchase orders and invoices are quite different. An invoice requests payment for
a purchase and are sent from the vendor to the purchaser. They include the same information as in the purchase
order, as well as an invoice number, vendor contact information, any credits or discounts for early payments,
payment schedule, and total amount due to the vendor.

The key differences between the two documents are that a purchase order prompts the creation of an invoice. A
purchase order is sent from the purchaser to the vendor, whereas an invoice is sent from the vendor to the
purchaser. In addition, the purchase order officially “orders” good or services from a vendor while the invoice
requests payment for the order.

Why should you automate the purchase order process?

The purchase order process is an important one, but in the absence of an e-procurement system, it is
undoubtedly manual and time consuming. With a system like PurchaseControl, the entire process becomes more
efficient. Here’s why you should automate this process:
All purchasing documents are centralized in one location, accessible from anywhere – Referencing
purchase requisitions and POs is far less painful with an e-procurement solution. You can access any of the
details you need, whenever you need them – in one place.

Automated vendor catalogues make purchase requisitions easier – You can create purchase requisitions
using a standardized form online using our automated vendor catalogues. There is no need to thumb through
outdated paper vendor catalogue books for goods or services. Online catalogues make it easy to find the item
you’re looking for at the right price from preferred suppliers. You can also store items for greater savings and
make purchasing more convenient.

Approvals happen faster – Getting purchase requisitions approved is faster and easier with an automated
system. You can send them directly to the person in charge of approving them through the system. Setting up an
approval workflow is as easy as clicking a button. Once that person is designated as the approver, they will
instantly begin to receive automated approval requests, which trigger the creation of a purchase order.
Approvals can be managed on the go – no more holding up orders.

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Purchase orders are easy to create and share – Like purchase requisitions, purchase orders are also easily
managed through e-procurement software. You no longer have to worry about the format for purchase orders
because it’s all pre-populated. On top of that, you can send them to vendors in any format.

More visibility into spend – With e-procurement systems, you have access to insights and analytics that can
help you manage business spend more effectively. You can see the impact of purchase requisitions before you
approve them, and budgets are automatically updated once a purchase order is sent.

See order status at a glance – Being able to see the status of all your orders in one place is a huge benefit to
automating the purchase order process. You can easily see important moments in the PO process, like which
purchase requisitions have been approved or rejected, and which purchase orders have been sent.

The purchase order process is an important one for businesses. Developing and maintaining a professional PO
process is great for building optimal supplier relationships, keeping an audit trail, and sticking to budgets,
among other valuable benefits. Automating it can help to streamline communications and minimize financial
risk.

6.9.4 Basic Inventory Procedures

A key component in effective kitchen management is inventory control. By knowing what supplies are on hand
at a given time, the manager will be able to plan food orders, calculate food costs since the previous inventory,
and make menu item changes if needed. By keeping an eye on inventory, it is possible to note potential
problems with pilferage and waste.

Managing inventory is like checking a bank account. Just as you are interested in how much money you have in
the bank and whether that money is paying you enough in interest, so the manager should be interested in the
value of the supplies in the storeroom and in the kitchen.

An inventory is everything that is found within your establishment. Produce, dry stores, pots and pans,
uniforms, liquor, linens, or anything that costs money to the business should be counted as part of inventory.
Kitchen items should be counted separately from the front of house and bar inventory and so forth.

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Regardless of the size of your operation, the principles of inventory control are the same. In larger operations
there will be more people and sometimes even whole teams involved with the various steps, and in a small
operation all responsibility for managing the inventory may fall on one or two key people.

Effective inventory control can be broken down into a few important steps:

 Set up systems to track and record inventory

 Develop specifications and procedures for ordering and purchasing
 Develop standards and procedures to efficiently receive deliveries
 Determine the frequency and processes for reconciling inventory

 Analyze inventory data and determine any areas for improvement

6.9.5 Setting Up Systems to Track and Record Inventory

One of the reasons you take inventory is to determine food costs and to work out cost percentages. There are
several procedures that simplify finding the value of goods in storage. These techniques are based on keeping
good records of how much supplies cost and when supplies were purchased.

The temptation in small operations is to treat inventory control casually. Perhaps there are only one or two
people doing the purchasing and they are usually aware of the supplies that are on hand. This doesn’t eliminate
the need to track purchases against sales to see if you are managing your costs as well as you can.

Almost all inventory control procedures are time consuming. Moreover, such records must be kept up-to-date
and done accurately. Trying to save a few hours by cutting back on the time needed to keep inventory records
may be money poorly saved.

The simplest method for tracking inventory is using a spreadsheet. A simple spreadsheet might list all of the
products that are regularly purchased, with the current prices and the numbers on hand at the last inventory
count. The prices can be updated regularly as invoices are processed for payment, and a schedule can be set to
count the product on hand.

In large operations, the systems need to be more sophisticated as there are more people involved. Purchases
might be made by a separate department, inventory records might be kept by a storeroom clerk, and the tracking
and counting of inventory might be tied to a system using scanners and barcodes, which in turn may be linked
with your sales system so that there is always a record of what should be in stock.

No matter the depth of detail used, having a system to track inventory gives managers a good idea of supplies
on hand and a tool to use to manage costs.

Incoming Inventory

The primary reason for establishing a consistent method for accepting ordered goods is to ensure that the
establishment receives exactly what has been ordered. Errors frequently occur, and unless the quantity and
quality of the items delivered are carefully checked against what was ordered, substantial losses can take place.
When receiving procedures are carefully performed, mistakes that could cost the restaurant time and money are
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avoided. In addition, an effective receiving method encourages honesty on the part of suppliers and delivery
people.

Invoices

The most important document in determining if the goods received are the goods ordered is the invoice. An
invoice is an itemized list of the goods or products delivered to a food preparation premise. An invoice shows
the quantity, quality, price per kilogram or unit, and, in some cases, the complete extension of the cost
chargeable. Only by carefully comparing and checking can you be sure that the information on the invoice
tallies with the products received. This comparison may require that items be weighed and/or counted.

Whenever possible, the receiver should check the invoice against the purchase order or purchase request slips.
This will ensure that the quantity and price of the goods shipped match those listed on the order form. If the
invoice is not checked against the purchase order when the goods arrive, there is the potential that you will be
missing products you need or receive products that were not ordered or are in incorrect quantities.

In addition, the quality of the goods should be determined before they are accepted. For example, boxes of fresh
produce and frozen foods should be opened and inspected to ensure quality.

When you are satisfied that the delivery is in order, sign the invoice. In most cases, the invoice is in duplicate or
triplicate: you keep the original and the delivery driver retains the other copy or copies. Once you have signed,
you have relieved the delivery company of its responsibilities and the supplies now belong to your company.
You may, therefore, become responsible for any discrepancies between what is on the invoice and what has
been delivered. It is good practice to bring any discrepancies or errors to the attention of the driver and have
him or her acknowledge the mistake by signing the invoice. If a credit note is issued, that should also be marked
on the invoice by the driver.
Note: Do not sign the invoice until you are sure that all discrepancies have been taken care of and recorded on the invoice.

Take the signed invoice and give it to whoever is responsible for collecting invoices for the company.

The receiving of deliveries can be time consuming for both the food establishment and the delivery service.
Often the delivery people (particularly if they are not the supplier) will not want to wait while these checks are
done. In this case, it is important that your company has an understanding with the supplier that faults
discovered after the delivery service has left are the supplier’s problems, not yours.

Once the invoices have been signed, put the delivered products in the proper locations. If you are required to
track incoming inventory, do so at the same time.

Outgoing Inventory

When a supply leaves the storeroom or cooler, a record must be kept to track where it has gone. In most small
operations, the supplies go directly to the kitchen where they are used to produce the menu items. In an ideal
world, accurate records of incoming and outgoing supplies are kept, so knowing what is on hand is a simple
matter of subtraction. Unfortunately, systems aren’t always that simple.

In a smaller operation, knowing what has arrived and what gets used every day can easily be reconciled by
doing a regular count of inventory. In larger operations and hotels, the storage rooms and coolers may be on a
different floor than the kitchen, and therefore a system is needed that requires each department and the kitchens
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to requisition food from the storeroom or purchasing department, much like a small restaurant would do directly
from the supplier. In this model, the hotel would purchase all of the food and keep it in a central storage area,
and individual departments would then “order” their food from the storerooms.

Requisitions

To control inventory and to determine daily menu costs in a larger operation, it is necessary to set up a
requisition procedure where anything transferred from storage to the kitchen is done by a request in writing. The
requisition form should include the name and quantity of the items needed by the kitchen. These forms often
have space for the storeroom clerk or whoever handles the storeroom inventory to enter the unit price and total
cost of each requested item (Figure 1).

In an efficiently run operation, separate requisition forms should be used by serving personnel to replace table
supplies such as sugar, salt, and pepper. However, often personnel resist using requisition forms because they
find it much easier and quicker to simply enter the storage room and grab what is needed, but this practice
leaves no record and makes accurate record keeping impossible. To reduce the possibility of this occurring, the
storage area should be secure with only a few people having the right to enter the rooms, storage freezers, or
storage refrigerators.

Figure 1: Sample Requisition Form

Date: _____________

Department: Food Service

Quantity Description Unit Cost Total Cost

6 #10 cans Kernel corn

25 kg Sugar

20 kg Ground beef

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 6 each Pork loins

Charge to:

Catering Dept.

C. Andrews

Chef

Not only does the requisition keep tabs on inventory, it also can be used to determine the dollar value of foods
requested by each department and so be used to determine expenses. In a larger operation where purchases may
be made from different suppliers at different prices, it may be necessary to tag all staples with their costs and
date of arrival. Expensive items such as meats are often tagged with a form that contains information about
weight, cost per unit (piece, pound or kilogram), date of purchase, and name of supplier.

Pricing all items is time consuming, but that time will soon be recovered when requisition forms are being filled
out or when the stock has to be given a monetary value. In addition, having prices on goods may help to remind
staff that waste is costly.

Inventory Record Keeping

There are two basic record keeping methods to track inventory. The first is taking perpetual inventory. A
perpetual inventory is simply a running balance of what is on hand. Perpetual inventory is best done by keeping
records for each product that is in storage.

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Perpetual inventory form.

When more of the product is received, the number of cans or items is recorded and added to the inventory on hand; when
some of the product is requisitioned, the number going out is recorded and the balance is reduced. In addition, the
perpetual inventory form can indicate when the product should be reordered (the reorder point) and how much of the
product should ideally be on hand at a given time (par stock).

In small operations, a perpetual inventory is usually only kept for expensive items as the time (and cost) of
keeping up the records can be substantial.

The second inventory record keeping system is taking a physical inventory. A physical inventory requires that
all items in storage be counted periodically. To be an effective control, physical inventory should be taken at
least monthly. The inventory records are kept in a spreadsheet or in another system reserved for that purpose.

The inventory sheet (Figure 3) can list the items alphabetically or in the order they will appear on the shelves in
the storage areas.

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6.9.6 Physical Inventory Form

Physical Inventory Form: March

Product Unit Count Unit Price Total Value

Lima beans 6 #10 4 1/3 ₹23.00 ₹99.60

Green beans 6 #10 3 5/6 28.95 110.98

Flour 25 kg bag 3 14.85 44.55

Rice 50 kg bag 1 32.50 32.50

Total ₹593.68

In addition to the quantity of items, the inventory usually has room for the unit cost and total value of each item
in storage. The total values of the items are added together to give the total dollar value of the inventory. This is
also knows as extending the inventory. The total value of the inventory is known as the closing inventory for
the day the inventory was taken. This amount will also be used as the opening inventory to compare with the
next physical inventory. If the inventory is taken on the same day of each month, the figures can be used to
accurately determine the monthly food cost.

The physical inventory is used to verify the accuracy of the perpetual inventory. For example, if 15 whole beef
tenderloins are counted during a physical inventory, but the perpetual inventory suggests that there should be 20
tenderloins on hand, then a control problem exists and you need to find the reason for the variance.

Computerized Inventory Control

Most people today use computerized systems to calculate, track, and extend inventory. These systems enable
the restaurant to have a much tighter and more accurate control over the inventory on hand and the costs of that
inventory. Having access to information such as ordering history and the best price paid is just one of the
benefits of these systems. They can also help the purchaser predict demand levels throughout the year. These
programs in many cases are also integrated with the point-of-sale (POS) system used to track sales, and can
even remove an item from a computerized inventory list when the waiter registers the sale of any menu item on
the restaurant terminal. That is, if a customer orders one chicken dish from the menu, all the items required to

make one portion of the chicken are discounted from inventory. This provides management with an constant up-
to-date perpetual inventory of most inventory items.
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Smaller operations will use a spreadsheet application to manage inventory, so you should also be familiar with a
program like Microsoft Excel if you are responsible for ordering and inventory. The information required for
the program to do the calculations properly is available from the invoices received with your supplies. That is,
the quantities and prices of the goods you most recently received should be entered into the computer program
either by you or by the restaurant’s purchaser. These prices and quantities are automatically used to calculate
the cost of the goods on hand. This automated process can save you an enormous amount of time and, if the
information entered into the computer is accurate, may also save you money. In any inventory system, there is
always a possibility for error, but with computerized assistance, this risk is minimized.

6.9.7 Pricing and Costing for Physical Inventory

The cost of items purchased can vary widely between orders. For example, cans of pineapple might cost ₹2.25
one week, ₹2.15 the second week, and ₹2.60 another week. The daily inventory reports will reflect the changes
in price, but unless the individual cans have been marked, it is difficult to decide what to use as a cost on the
physical inventory form.

There are several different ways to view the cost of the stock on the shelves if the actual cost of each item is
difficult to determine. Most commonly, the last price paid for the product is used to determine the value of the
stock on hand. For example, if canned pineapple last cost ₹2.60 a can and there are 25 cans on hand, the total
value of the pineapple is assumed to be ₹65 (25 x ₹2.60) even though not all of the cans may have been bought
at ₹2.60 per can.

Another method for costing assumes the stock has rotated properly and is known as the FIFO(first-in first-out)
system. Then, if records have been kept up-to-date, it is possible to more accurately determine the value of the
stock on hand.

Here is an example showing how the FIFO system works.

Example 10

The daily inventory shows the following:

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 Date Number and value of cans

Opening inventory, 1st of month 15 cans @ ₹2.15 = ₹32.25

Received on 8th of month 24 cans @ ₹2.25 = ₹54.00

Received in 15th of month 24 cans @ ₹2.15 – ₹51.60

Received on 23 of month 12 cans @ ₹2.60 – ₹31.20

If the stock has rotated according to FIFO, you should have used all of the opening inventory, all of the product
received on the 8th, and some of the product received on the 15th. The 25 remaining cans must consist of the 12
cans received on the 23rd and 13 of the cans received on the 15th. The value of these cans is then

12 cans @ ₹2.60 = ₹31.20

13 cans @ ₹2.15 = ₹27.95

Total = ₹59.15

As you can see, the choice of costing method can have a marked effect on the value of stock on hand. It is
always advisable to use the method that best reflects the actual cost of the products. Once a method is adopted,
the same method must be used consistently or the statistical data generated will be invalid.

Costing Prepared or Processed Items

When you are building your inventory forms, be sure to calculate the costs of any processed items. For instance,
sauces and stocks that you make from raw ingredients need to be costed accurately and recorded on the
spreadsheet along with purchased products so that when you are counting your inventory you are able to reflect
the value of all supplies on the premises that have not been sold.

(We will discuss more about calculating the costs of products and menu items later in this book.)

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6.9.8 Inventory Turnover

When accurate inventory records are kept, it is possible to use the data in the records to determine the
inventory turnover rate. The inventory turnover rate shows the number of times in a given period (usually a
month) that the inventory is turned into revenue. An inventory turnover of 1.5 means that the inventory turns
over about 1.5 times a month, or 18 times a year. In this case, you would have about three weeks of supplies in
inventory at any given time (actually 2.88 weeks, which is 52 weeks ÷ 18). Generally, an inventory turnover
every one to two weeks (or two to three times per month) is considered normal.

A common method used to determine inventory turnover is to find the average food inventory for a month and
divide it into the total food cost for the same month. The total food cost is calculated by adding the daily food
purchases (found on the daily receiving reports) to the value of the food inventory at the beginning of the month
and subtracting the value of the food inventory at the end of the month.

That is,

Average food inventory = (beginning inventory + ending inventory) ÷ 2

Cost of food = beginning inventory + purchases − ending inventory

Inventory turnover = (cost of food) ÷ (average food inventory)

Example 11

A restaurant has a beginning inventory of ₹8000 and an ending inventory of ₹8500. The daily receiving reports
show that purchases for the month totaled ₹12,000. Determine the cost of food and the inventory turnover.

Cost of food = ₹8000 + ₹12 000 − ₹8500 = ₹11 500

Average food inventory = (₹8000 + ₹8500) ÷ 2 = ₹8250

Inventory turnover = ₹11 500 ÷ ₹8250 = 1.4

The turnover rate in the example would be considered low and would suggest that the business has invested too
much money in inventory. Having a lot of inventory on hand can lead to spoilage, high capital costs, increased
storage space requirements, and other costs.

Inventory turnover rates are not exact, for a few reasons. One is that in many food operations, accurate
inventory records are usually kept only for more expensive items. Another is that the simple food cost used in
the calculation does not truly reflect the actual food cost. (Food costs are discussed in another chapter in this
book.) In addition, not all inventory turns over at the same rate. For example, perishables turn over as quickly as
they arrive while canned goods turn over more slowly.

Even though turnover rates are not exact, they do give managers at least a rough idea of how much inventory
they are keeping on hand

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A sample perpetual inventory form for canned peaches.

Item: Canned Peaches (540 mL). Reorder Point: 10, Par stock: 15

Date In Out Balance

June 16 None 3 12

June 17 None 3 9

June 18 6 None 15

June 19 None 2 13

In Fairfield by Marriott They are Using “BIRCH STREET”.

Requisition
Purchase order
Item creation
Vendor creation

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SUGGESTIONS

The profit Of the Hotel Is not in a good Position For That company has to Take Alternative Actions
such As

Increasing in Procurement in Hotel,

Production, and Control in Expenses Like, Administrative, selling Etc.

The hotel have low current ratio so it should increase its current ratio where it can meet its short term
obligation smoothly.

Liquidity ratio of the hotel is not better liquidity position in over the five years. So I suggested that the
firm maintain proper liquid funds like cash and bank balance.

It should enhance its employee’s efficiency, more training needed to its employees in order to increase
its production capacity and minimize mistakes while performing the tasks, also more safety precaution
need to implement to the employees who directly working on food production process.

The hotel high inventory so I suggested that the firm must reduce the stock by increase sales.

The direct material cost of the hotel is very high so it’s my advice to the hotel that to decrease the direct
material cost by purchasing raw material from the other suppliers.

The hotel should have proper check on the food production process of the kitchen.

CONCLUSION

This project of Accounts payable and Receivable in the production concern is not merely a work of the project.
But a brief knowledge and experience of that how to analyze the financial performance of the hotel. The study
undertaken has brought in to the light of the following conclusions. According to this project I came to know that
from the analysis of financial statements it is clear that Fairfield by Marriott. Have been incurring loss during the
period of study. So the hotel should focus on getting of profits in the coming years by taking care internal as well
as external factors. And with regard to resources, the firm is take utilization of the assets properly. And also the
firm has a maintained low inventory.

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BIBLOGRAPHY

Lachmann, M., U. Stefani and A. Wöhrmann. 2015. Fair value accounting for liabilities: Presentation format of
credit risk changes and individual information processing. Accounting, Organizations and Society (41): 21-38.

Lambert, S. L. 2017. Auto Accessories, Inc.: An educational case on online transaction processing (OLTP) and
controls as compared to batch processing and controls. Journal of Emerging Technologies in Accounting 14(2):
59-81.

Lange, C. D., J. M. Fornaro and R. J. Buttermilch. 2013. Debt restructuring in nontroubled situations: Carefully
navigating the relevant guidance. The CPA Journal (April): 26-35.

Lanza, R. B. 2009. Cost Recovery: Turning Your Accountants Payable Department into a Profit Center. Wiley.

Lapsley, I. 1985. Risk capital for a profitable public corporation: Public dividend capital or
equity? Abacus 21(1): 3-18.

BOOKS:
1. M.Y. KHAN, P.K.JAIN (1981), Financial Management, and Cost Accounting (third edition) New
Delhi: McGraw – Hill publishing company limited.

2. I.M.PANDEY.Financial Management New Delhi Vikas publishing house private Ltd –ninth addition 2004.

4. Financial Statement.

WEBSITES
www.google.com

Babasabpatilfreepptmba.com

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