Accounting Principles for Hospitality and Tourism (HTB2004) Temasek

Polytechnic

Topic 2: PROFIT & LOSS STATEMENT

(INCOME STATEMENT)
Learning Objectives:

At the end of the lecture, you should be able to:

1. Explain the purpose of the Profit & Loss Statement.

2. Explain the major components of the Profit & Loss Statement, including
Departmental Profit & Loss Statements.
3. Describe the format of the Profit & Loss Statement.
4. Explain the Revenue Recognition Principle and distinguish it from cash
flows.
5. Explain the concept of Uniform System of Accounts for hospitality
operations.

Reading:
Chapter 11, Accounting for the Hospitality Industry by Moncarz & Portocarrero
Chapter 5, Hospitality Industry Financial Accounting by Schmidgall and Damitio

What does a Profit & Loss Statement show?

It shows the results of operations of a business entity for a particular period of time e.g.
a month or a year. It indicates whether management has achieved its primary
objective of attaining a certain level of earnings for the owners of the business.

This is possible by showing:

 the ______________________ by the business during a specific accounting period
 the ________________________ in earning these revenues
resulting in a net profit (net income) or net loss for the period reported.

The relationship between revenue and expenses is expressed in this equation:

=
(Net Income)

for a specific period eg a month, a year etc

Student’s Copy 1
Accounting Principles for Hospitality and Tourism (HTB2004) Temasek
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A simple Profit & Loss Statement is shown here:-

Barney Travel Agency

Profit & Loss Statement
for the month of June 2005
Revenue
Commissions $ 25,000
Other Income (Revenue) 5,000
30,000
Less: Expenses
Salaries $ 5,000
Utilities 2,000
Advertising 1,500
Interest Expense 1,000
Telephone 2,000
Depreciation 4,500 16,000
Net Profit $ 14,000

Who are the users of Profit & Loss Statement?

Each user of financial information seeks information for their own specific needs.

Types of Users Reasons for using Profit & loss Statement

interested in profitability as an indicator of:

 potential cash dividends
 increase in market prices of shares
-----------------------
interested in profitability as an indicator of the firm’s
ability to pay its bills.
-----------------------
wants the operating results to indicate the degree of
their success in managing operations.
-----------------------

Components Of Profit & Loss Statement

The major components of a Profit & Loss Statement (income statement) are:
 Revenue
 Expenses
 Gain/Losses

Revenue

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What is revenue?
Inflows of cash or other assets resulting from the sale of goods, rendering of services
and others. Revenues encompass all income-producing activities.
Examples of revenue earned in a:
Hotel Travel Agency Tourist Attraction
Room Sales Revenue Sales of Tour Entrance Fee
F&B Sales Revenue Sales of Air Tickets Sales of Souvenir
Laundry Revenue Commission Revenue Rental Revenue

When to recognise revenue?

Timing of recognition of revenue is an area of major concern in accounting.
Why? Because it has a major impact on the determination of _________________.

Revenue-recognition principle
With an accrual basis accounting system, revenue is to be recognised at the time it is
___________ , which generally occurs when goods are ________ or services
____________. When a hotel guest is served a meal, the food sales have been
earned.

In recognising revenue, what is important is when the revenue is earned, NOT

when __________ is received.

Illustration A
Ah Beng operates a shoe-shine business at the All-Season Hotel (a luxury hotel)
that caters to the hotel guests only. He charges $10 per shoe-shine service.
Hotel guests who use his services pay through the normal billing by the
hotel. The hotel, in turn, pays Ah Beng on the 15th day of the following
month.

In the month of June, Ah Beng served 30 guests.

He received $250 cash from the hotel for prior month services.

If you are asked to prepare a profit & loss statement for Ah Beng for the month of June,
how much should be reported as shoe-shine revenue ?

Revenue for June

Expenses

What are expenses?

Expenses are goods or services ____________ in the process of earning revenues.

Examples of expenses incurred in a:

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Hotel Travel Agency Tourist Attraction

Food Cost Salary of Consultants Utilities
Guest Supplies Cost of Hotel stay Maintenance cost
Laundry Expenses Cost of Air Tickets Cost of Souvenirs

When to recognise expenses ?

Expenses should be recognized in the period it was incurred in earning a particular
revenue.
eg. the cost of the telephone calls should be reported in the same period (month)
as when the revenue is earned, i.e. when the calls are made (by the guests).
The proper matching of expenses against revenues during an accounting period is a
crucial objective in the preparation of a Profit & Loss Statement.

In recognising expenses, what is important is when the expense is incurred,

NOT when _______________ is made.

Illustration B
Ah Beng who owns the shoe-shine business, employs an assistant, Mei Mei, who
agrees to work for $2 per shoe-shine. Ah Beng will pay her on the 15th of
the following month.

In the month of July, Mei Mei served 40 customers.

Ah Beng paid her $250 on the 15th of July for her prior month work.

If you are asked to prepare a profit & loss statement for Ah Beng for the month of
July, how much should be reported as wage expense of Mei Mei ?

Wage expense for July

Cost of Goods Sold - A Major Expense

Cost of goods sold (also known as ___________________) is a major expense item
for business that sell goods. In a hospitality firm, inventories for sale may include
 food
 beverage
 sundry merchandise for sales (e.g. candy, souvenirs).

There are various systems to record and control inventories (which will be studied at a
later stage).

Let us assume that all purchases of inventories are recorded in an inventory account,
and no records are made for issue of inventories. At the end of an accounting period, a
physical inventory is taken and the cost of good sold is determined.

Illustration C
Shortbeach Seafood Restaurant provides the following information at 30 June 2005:

Food inventory, 1 Jun 2005 $ 5,000

Food purchases during June 20,000

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Food inventory, 30 Jun 2005 6,000

What is the cost of food sold for the month of June?

Food inventory, 1 Jun 2005 $
Food purchases during June ________
Food available for sale
Less: Food inventory, 30 Jun 2005 ________
Cost of Food Sold

If the food was used for other purposes (internally) and not sold, adjustments need to
be made to the above computations.

Illustration D
Given the information from Illustration C, Shortbeach Seafood Restaurant provided
additional information:

Cost of employee meals (provide free to employees) $ 3,000

Cost of entertainment meals 200
Food transfers to beverage department 50
(eg. pineapples for preparation of cocktails)

What is the cost of food sold now?

Food inventory, 1 Jun 2005 $ 5,000 These expenses ($3,250)
Food purchases during June 20,000 were consumed internally
Food available for sale 25,000 by the business and not
Less: Food inventory, 30 Jun 2005 6,000 sold to the customers. As
such, they belong to the
Cost of food used 19,000
section of “other
less:
expenses”, not “Cost of
Cost of employee meals Food Sold”. Note that the
Cost of entertainment meals total expenses for the
Food transferred to beverage ______ restaurant is still $19,000.
Cost of Food sold 15,750

Gross Profit

In departments where they are selling products, the format of the profit & loss
statement requires them to calculate the gross profit before the net profit.

………………………….
- ………………………….
Gross Profit

The calculation of gross profit is important as it is useful in analyzing trading

performance, for example.

A business reported the following results:

2004 2005

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Sales Revenue $ 10,000 $ 20,000

less: Cost of goods sold 5,000 12,000
Gross Profit 5,000 8,000

Some questions that may by asked:

Sales in 2005 increased by 100% over 2004. Did the gross profit increase by a
corresponding margin? Do you think that, from the information provided, 2005 was a
better year than 2004?
Answer

Sales revenue increased by 100% ($10,000 to $20,000) and the overall gross profit
increased by 60%($5000 to $8000) However the gross profit margin decreased from
50% (2004) to 40% (2005). See computations below.
2004 2005
Gross Profit ________ ________
Sales Revenue

Gross Profit Margin = 50% 40%

This indicates that there has been a decline in profitability in 2005 compared to 2004.
This could be due to
 more _______________ purchases of goods from suppliers.
 drop in selling ________________

Gains and Losses

 These gains or losses result not from the normal operations of the business
eg. gain on sale of equipment
- Sold an old furniture, which had a value of $800 in the accounting books, for
$1,000. This would show a gain of $200 in the Profit & Loss Statement.

eg. loss on sale of equipment.

 Revenue and expenses are distinguished from gains and losses. Generally,
management is held primarily accountable for operations (ie. earning revenue and
incurring expenses) and __________________ for gains and losses.

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Accounting Principles for Hospitality and Tourism (HTB2004) Temasek
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Departmental Profit & Loss Statements

In the hospitality and tourism industry, the financial statements are usually prepared by
__________________. This format allows for the respective department heads to be
held accountable for the respective department’s revenue and expenses. Those
departments which earned any form of revenue is referred to as operated
departments.

Below is an example of a typical Departmental Profit & Loss Statement of a hotel

operated department with gross profit calculation:

Hotel Tropical
Departmental Profit & Loss Statement - Food department
for the year ended 31 December 20XX
Revenue
Food Sales $ 800,000
Less: Cost of food sold 322,400
Gross profit 477,600
Other Revenue
Private Rooms Charge 51,600
529,200
Other Departmental Expenses
Salaries and wages 281,800
Employee Meals 30,100
Music & Entertainment 7,100
Cleaning supplies 6,400
Paper supplies 2,200
Guest supplies 6,500
Laundry 15,500
License 3,400
Linen 3,700
Menus 2,000
China, glassware 800
Decorations 4,900
Printing, stationery 4,700
Travelling Expense 2,300
Uniforms 3,100
Miscellaneous 1,700
Total expenses 376,200
Departmental Profit (Income) 153,000

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Accounting Principles for Hospitality and Tourism (HTB2004) Temasek
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In hospitality and tourism organizations, there are some departments which do not
earn any revenue but provide a service to the operated departments (eg. accounting
department, human resource department, marketing department). The following Profit
& Loss Statements are samples of such departments:

Hotel Tropical
Administrative and General
for the year ended 31 December 20XX
Salaries and Wages $ 32,800
Employee Benefits 8,200
Total Payroll and Related Expenses 41,000
Other Expenses
Credit Card Commissions 9,300
Data Processing 2,180
Dues and Subscriptions 1,320
Human Resources 5,460
Insurance – General 7,640
Operating Supplies 4,380
Postage and Telegrams 12,680
Professional Fees 540
Provision for Doubtful Accounts 10,940
Travel and Entertainment 7,560
Other 5,500
Total Other Expenses 67,500
Total Administrative and General $ 108,500

Hotel Tropical
Marketing
for the year ended 31 December 20XX
Sales
Salaries and Wages $ 6,800
Employee Benefits 570
Total Payroll and Related Expenses 7,370
Other Expenses 8,630
Total Sales 16,000
Reservations
Salaries and Wages 600
Employee Benefits 100
Total Payroll and Related Expenses 700
Other Expenses 2,900
Total Reservations 3,600
Advertising and Merchandising
Direct Mail 6,900
In-House Graphics 3,700
Outdoor 1,300
Point-of-Sale Material 950
Print 3,900
Radio and Television 4,360
Selling Aids 900
Other 5,690
Total Advertising and Merchandising 27,700
Fees and Commissions
Agency Fees 600
Franchise Fees 6,100
Other 100
Total Fees and Commissions 6,800
Miscellaneous Marketing Expenses 900
$ 55,000

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Total Marketing Expenses

The Uniform System of Accounts for Hotels (USAH)

The Uniform system of Accounts for Hotels(USAH) was developed in 1923 with the
prime objective of providing a uniform ______________, _______________ and
_______________ of financial information.

The USAH has served as the guiding light in the formulation of other uniform systems
in the hospitality service industries. These systems include the Uniform System of
Accounts for Restaurants and the Uniform system of Accounts for Clubs.

The benefits of the uniform system are:

 Provides uniform classification and presentation

 Allows easier ________________ between firms
 Simplifies development of industry, national or worldwide statistics
 Permits _______________ of departmental performance
 Permits evaluation of managers/persons in charge of each department

Illustration F
Prepare a Departmental Profit & Loss Statement of the following JAG Restaurant for
the month of March 2006 given the following balances:
$
Cost of food sold 35,000
Cost of beverage sold 18,000
Fire loss 10,000
Foods sales 120,000
Other income 5,000
Salaries and wages 45,000
Supplies expense 7,000
Equipment at cost 70,000
Beverage sales 50,000
Insurance expense 14,000
Interest expense 13,000

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Accounting Principles for Hospitality and Tourism (HTB2004) Temasek
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Answer to Illustration F

JAG Restaurant
Profit & Loss Statement for the month of March 2006
Food Beverage Total
Revenue 170,000
Less: Cost of Sales 53,000
Gross Profit 117,000
Add: Other Income 5,000
122,000
Less: Expenses
Salaries and wages
Supplies expense
Insurance Expense
Interest Expense
Fire loss
Total Operating Expenses _______
Net Profit (Net Income)

Consolidated Profit & Loss Statement

In this lecture, we learnt how to prepare the Profit & Loss Statement of a department.
We also learnt about its format and the standards required by the Uniform System of
Accounts for Hotels.

However, the management and owners of the hotel would also be interested in the
profitability of the _______________________, not only its departments. This would
require the preparation of a _________________ Profit & Loss Statement for the
entire hotel. It is the consolidation of all the departmental profit & loss statements and
other details not found in the departmental statements. In order to encourage
uniformity in preparing financial statements, a Uniform System of Accounts for Hotels
(USAH) was developed.

A sample of a consolidated Profit & Loss for the entire hotel is found in Appendix A.
The basic structure of the consolidated P&L statement is:

Operated Departments’ Profits

Department A’s net profit xx
Department B’s net profit xx
Department C’s net profit xx
Total Operated departmental profit xx
Less: Undistributed operating expense xx
Profit before fixed charges xx
Less: Fixed charges xx
Profit before income taxes xx
Less: income taxes xx
Net Profit after taxes xx

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Appendix A

Hotel Tropical
Consolidated Profit & Loss Statement
for the year ended 31 Dec 20xx

Operated Departments (Profit Centres)

Room Department’s Profits 605,000
Food and Beverages Dept Profit 153,000
Telephone Dept Losses (4,000)
Rentals and Other Income Revenue 55,000

Total Operated Departments Profits (a) 809,000

Less: Undistributed Operating Expenses(Cost Centres)

Administrative and General 108,500
Marketing 55,000
Property Operation and Maintenance 67,500
Energy (Utility) Costs 81,500
Total Undistributed Operating Exp (b) 312,500

Profit Before Fixed Charges (a) – (b) 496,500

Less: Fixed Charges (Fixed Costs)

Rent Expenses 20,000
Property Taxes 24,000
Insurance Expenses 6,000
Interest Expenses 60,000
Depreciation Expenses 61,000
Total Fixed Charges (c) 171,000

Net Profit Before Income Taxes (a) – (b) – (c) 325,500

Less: Income Taxes (22%) 71,610

Net Profit After Income Taxes 253,890

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