FOR EDUCATIONAL PURPOSES USE ONLY

FOR EDUCATIONAL PURPOSES USE ONLY

ACCOUNTING AND FINANCE IN THE HOSPITALITY AND TOURISM INDUSTRY
The course will cover the essential topics of Accounting and Finance in the Hospitality and
Tourism Industry students are expected to learn the foundations of basic accounting and
elements of finance that they can use in the industry upon completing the course. This is an
introductory course where students must be able to prepare simple accounting statements
such as statements of financial position, balance sheets, and statements of cash flow. In
addition, the student will learn about the business environment and the role of finance in the
stability of the business as well as financial system and analysis.

CHAPTER I
ACCOUNTING BASICS AND ELEMENTS OF
LEARNING OUTCOMES
FINANCE IN THE HOSPITALITY AND TOURISM

Upon finishing this session, the learner is expected to:

• Explain the concept of Accounting and Finance in Hospitality and Tourism
Industry.
• Discuss the goals and functions of Accounting and Finance.
• Discuss agency and business organization; and
• Research and discuss the recent economic developments in the field of
accounting and finance.

INTRODUCTION

Many years back, doing business is simple. There are few people doing business and few
people patronizing the products and services. Businessmen during that time can easily
pinpoint their customers and their needs. But as population increases, so do the businessmen
and customers. Transactions have gotten complex, and the consumers' behavior shifted to a
higher level. Factors affecting these changes are:

1. Businesses open local branches in various communities, later on to various provinces

and cities, and then ultimately to the other parts of the globe.

2. Some managers are now educated and trained in well-known business colleges and
universities abroad and bring home (here in the Philippines) business knowledge they
acquire from their studies.

3. Businesses are now accepting multi-currency transactions.

4. Business centers are now open in bigger venues with so many facilities opened for
customers which have amazed the eyes of the consuming public.

5. Accounting has entered into global milieu. As international accounting standards slowly
crept in the local setting, local standards have to be shifted to higher levels to keep up
with the changing accounting environment.

With these changes, technology showed how business should behave. In recent years,
technology has totally changed the architecture of business undertakings. Thus, doing
business in this fast-moving world has become more sensitive to the basic needs of customers.
Companies from all over the world keep on updating product knowledge, organizational re-
engineering, personnel retooling, among others, in order to maintain their competitive edge
against competitors to hold the industry leadership. This is business stewardship. "And the

FOR EDUCATIONAL PURPOSES USE ONLY

Lord said, who then is that faithful and wise steward, whom his lord shall make the ruler over
his household to give them their portion of meat in due season" (Luke 12:42, KJV). The Lord
is expecting the people to manage well their activities as these businesses can also be used
as a channel of blessing from God (spiritual), to the country (nationalism), and to the people
(livelihood or employment).

Hospitality and Tourism Industries are no different with the other business, which is the main
purpose of the business is to gain profit through quality and excellent service being provided
to its patrons.

ACCOUNTING DEFINED

There are three accounting definition. The first one says that accounting is a service activity.
It functions to provide quantitative information, primarily financial in nature about economic
entities that are intended to be useful in making economic decisions with reasoned choices
among alternative courses of action.

The quantitative information refers to the financial statements. These financial statements are
as follows:

1. Balance sheet is the statement of financial condition or financial position that gives
the user information about the condition of the business enterprise as of a given
period. The word "as of" means that the statement contains cumulative figures from
the start of the business commercial operation up to the present statement date.
2. Income statement is the statement of the results of operation. It is the statement
that gives information to the users the idea whether the business enterprise makes
profit or losses for a period. The word "for a period" means that the statement contains
figures that transpired only during the period of the statement date.
3. Statement of cash flows is the statement that gives information to the users about
the cash sources and the cash uses of the business enterprise during a given period.

This quantitative information are primarily financial in nature, which means the financial
statement should always be expressed in terms of money or cash. In addition, they give
information about economic entities and the total financial picture of the business enterprise.
Thus, the users can make sound economic decision with reasoned choices among alternative
courses of action. They can also maximize the full potential of the resources of a business
enterprise.

The second definition of accounting is that Accounting is the process of recording, classifying,
and summarizing, in a significant manner and in terms of money, transactions, and events,
which are in part, at least of a financial in character and interpreting the results thereof.
Accounting, in this sense, explains how quantitative information are being processed according
to their ultimate uses.

The word recording means the writing down of business transactions in the official book of
accountants. Official book of accounts is important because it is where business transactions
are recorded. Business transactions should not be recorded in any kind of books that the
accountant or the owner prefers; they should be recorded in an official book duly registered
with the Bureau of Internal Revenue (BIR). When the BIR examiner visits your office, he will
check whether you are using a registered official book of accounts, and he will examine its
content. The inspection is done to assure that your business is under the government's control
for tax purposes. In recording, we do not just write down business transactions in any manner

FOR EDUCATIONAL PURPOSES USE ONLY

we like. We also have to organize or classify them. Classifying means sorting of business
transactions to their specific accounts. The reason for classifying is for easy summarizing,
which is the next process in accounting. Summarizing is the summing up of the business
transactions recorded in the book of accounts. These three processes. comprise the first phase
of accounting, which is referred to as bookkeeping.

Bookkeeping is defined as the systematic and chronological recording of business

transactions, observing therein the fundamental principles of accounting. A bookkeeper's work
is therefore called bookkeeping. The word "chronological" means the transactions should be
recorded in accordance with the date of the business transactions, from the first day of the
month to the last day of the month. In actual practice, a bookkeeper's work covers the
recording of the preparation of a trial balance. The preparation of trial balance is supposedly
the end product of a bookkeeper and the starting point of an accountant's work.

Going back to our definition of accounting, it states that the recording, classifying, and
summarizing must be in terms of:

1. Money-means cash;

2. Transaction-the exchange of values. Values are money, rights, properties, and

services. Therefore, if there are exchanges among these values, there will be
transactions which should be recorded in the official book of accounts; and

3. Event - is the act of happening. In accounting, an event must have an impact in the
business enterprise. The impact could either be positive or negative. Most of the time,
negative account is recorded than positive. Impact, in this sense, means losses
(quantifiable in terms of money) on the part of the business enterprise, caused by any
event. For example, a typhoon hit Metro Manila and it destroyed some of your business
enterprise assets. As far as your business enterprise is concerned, this is considered
an event. On the other hand, if the typhoon did not destroy other business enterprises,
then it would not be considered an event for them. Hence, an event is more specific
to a business enterprise and not to a specific place. It is very important that as a
student you should be able to identify an event, because an event is recorded in the
books of accounts.

Likewise, money, transaction, and event justify our first definition of accounting, that it is
financial in nature.

The last phase of accounting is interpretation. It is not enough that financial statements should
be prepared; they should also be interpreted so they can be used appropriately in decision-
making process.

THE PROCESS OF ACCOUNTING

Accounting can be defined as a process with four major steps:

• Identification – this is where economic events happen, and they are known as
transactions. An economic event will affect a business and can also be measured
• Recording – record, classify, summarize the monetary effects of the transactions to
the business
• Prepare – prepare the accounting work in the proper format so as to communicate
with all the various users of the accounting information

FOR EDUCATIONAL PURPOSES USE ONLY

 • Analyze – interpret the results from all the accounting reports. This is an important
step. A good manager needs to be able to understand and explain what the numbers
mean to all interested parties such as the owners

To summarize the accounting process, enumerated herewith are the usual processes:

1. Collection of business documents as transactions occurred. These business

documents will serve as pieces of evidence for a finished transaction. They are
essential as support to the recorded transactions.

2. Recording in the journal book. Journal book is the book of original entry. It
is the book where transactions are first entered. Recording may vary from company
to company, depending on the accounting system designed by the accountant. It could
be that the business documents can be recorded directly to books, without the
necessity of recording other business forms to authorize them. This is especially true
for small business enterprises where transactions are minimal that the accountant or
the owner could easily remember the arrangements when necessary. In other
companies, when the collection of business documents for specific transactions are
already finished, there is what we termed to as vouchers. In the vouchers, the
accounting clerk or junior accountant types the entries appropriate for the
transactions. Then, the vouchers will be checked by the supervisor in charge and will
finally be approved by an accounting officer. The approval means the transactions are
approved for recording in the company's books of accounts. This is a very common
practice especially for medium- and big-sized companies. This is also a matter of
control that all entries recorded in the book of accounts are authorized by a company
officer responsible for such.

3. Posting. After all transactions for the month are recorded, a total will be made per
account. The totals will then be transferred to another book called the general ledger.
The ledger is the book of final entry.

4. Preparation of trial balance. The trial balance can be prepared by getting the net
balance of an individual account. If the trial balance statement is balance, it means
the posting process was properly made but not necessarily correct. In case of error, it
can be counterchecked by analyzing each account. A technique is introduced in
Chapter VI to facilitate the locating of error as to why a trial balance failed to balance.

5. Preparation of adjustment entries. An adjusting entry is necessary to update an

account or correct an error. In so doing, an account will be presented fairly in the
financial statement.

FOR EDUCATIONAL PURPOSES USE ONLY

 6. Preparation of working paper. Working paper is an accountant's scratch paper,
but as much as possible, it must be neatly done. It facilitates the preparation of
financial statement. The process of preparing the working paper is explained and
illustrated in Chapter VII. Preparation of the financial statements. This includes the
income statement, balance sheet, and the statement of cash flows. Income statement
should be prepared first because the net income figures will serve as the input in the
capital account, which are located in the balance sheet. Without them, the balance
sheet cannot be completely
done. Preparation of the closing entries, post-closing trial balance, and reversal entries.
As soon as you finish the financial statement, go back to process number 1. However,
if it is the end of the accounting period, then the following processes must be done.

a. Preparation of the closing entries. Closing entries mean that all nominal and
temporary accounts will be closed to capital account so that the remaining accounts
will be the permanent or the real accounts.
b. Preparation of the post-closing trial balance. Post-closing trial balance is
essential to balance the accounts so that before the start of another accounting
period, the accounts are already balanced.
c. Before we formally open the books for the first transactions to be recorded in, we
still have one optional process and this is the preparation of reversal entries.
d. We are now ready to start another process following the same process above.

Now, we will take the last definition of accounting: Accounting is a language of business. As
a business language, some Standard English terms could mean differently when used in
accounting. Nevertheless, accounting terms are within the user's range of understanding.
Since accounting is the language of business, it also entails communication. Accounting is
communicating financial statement to the users. Consequently, ordinary users of financial
statement are able to understand a report.

THE BASIC ACCOUNTING EQUATION

The basic accounting equation is A = L + OE **or any variation of that** such as A – L = OE,
or A – OE = L. “A” stands for your assets, resources owned by the business that will have
future economic benefit (e.g., cash, accounts receivable, land, inventory, the building itself,
office supplies). “L” stands for liabilities, the existing debts & obligations of the business that
have future claim on the economic benefits of the business (e.g., salaries and wages, accounts
payable, long-term debt) (hint: pretty much anything “payable” is a liability). Finally, “OE”
stands for owner’s equity, and this is the ownership claim on the assets of the business.

OE is a bit more complicated than assets and liabilities in that it has two parts: paid in capital
and retained earnings. Paid in capital is the contribution to the business by the owners. This
is the investment of the owners, that they “paid into” the business when they first started
their business. Retained earnings is the money the owners put back (retained) in their
business when the business made money. How do one get the number for retained earnings?
There are three parts to this. Imagine you have a bakery, and you sell wonderful cupcakes.
On a daily basis, people come and buy cupcakes from you, and they pay you – these are the
revenues. Then, of course, to make the cupcakes and to open the door of your bakery to let
people in to buy your cupcakes, you must pay for a lot of things such as all the ingredients to
make the cupcakes (flour, sugar, eggs, spices, etc.), wages to your employees, rent for the
store, utilities, etc. – these are the expenses. Then, at the end, as the owner, you may want
to take some money out from the business – why not? Isn’t this the reason people go into

FOR EDUCATIONAL PURPOSES USE ONLY

business, so they can make money, and then take the money out for their own personal use?
This is known as withdrawals (if the business is a sole proprietorship or partnership) or
dividends (if the business is a corporation).

Therefore, Revenues – Expenses = Profits or Loss; and Profits or Loss – Withdrawals or

Dividends = Retained Earnings. In other words:

Revenues – Expenses – Withdrawals/Dividends = Retained Earnings

Thus, the relationship between assets, liabilities, owner’s equity, capital, retained earnings,
revenues, expenses, and withdrawals/dividends can be expressed as follow:

ILLUSTRATION

Assets = Liabilities + Owner’s Equity

+ Capital +Retained Earnings

+ Revenue
- Expense
- Withdrawals/ Dividends

Example: Accounting Equation

You invested P100,000.00 into a new coffeeshop. The coffeeshop needs P150,000.00 for some
new kitchen equipment and you must get a loan of P50,000.00 in City Savings Bank to pay
for the rest of the equipment. What do these peso amounts represent?

Answer:

P100,000.00= Owner’s Equity

P150,000.00= Assets of the coffeeshop
P50,000.00= Liabilities

Assets = Liabilities + Owners Equity

P150,000.00 = P50,000.00 + P100,000.00

Example: Taking the Accounting Equation to the Next Step

Your hotel earned P600,000.00 in sales this month after paying P500,000.00 in expenses
(from rooms expense to wages and everything in between). Luckily, you end up profiting
P100,000.00. To keep all owners happy, you decided to pay them P40,000.00, leaving
P60,00.00 to reinvest in your hotel. Label each amount.

Answer:

P600,000.00 = Revenue
P500,00.00 = Expenses
P100,000.00 = Profits (Revenue – Expenses = Profits)

FOR EDUCATIONAL PURPOSES USE ONLY

P40,000.00 = Withdrawal
P60,000.00 = Retained Earnings (Profits – Withdrawal/ Dividends = Retained Earnings)

EXAMPLE OF INCOME STATEMENT AND STATEMENT OF FINANCIAL CONDITION

EXAMPLE OF STATEMENT OF FINANCIAL CONDITION

FOR EDUCATIONAL PURPOSES USE ONLY

 ACCOUNTING CONCEPTS AND PRINCIPLES

In preparing the financial statements, an accountant is guided by different concepts and

principles, which are formulated by the accounting profession. Some of these concepts and
principles are as follows:

1. Entity concept- This concept states that the personality of the owner and the
personality of the business are distinct and separate from each other. This means the
personal expenses of the owner cannot be recorded in the book of the business. One
of the principles of accounting is that the owner and the business enterprise have
different personalities; thus, they cannot be merged. Each personality must maintain
its own records of transactions. Examples of the application of this concept are as
follows:

a. When a person opens a business, he will give a name to his business enterprise.
Therefore, there will be two personalities-the people representing the owner
and the name of the business enterprise representing the business opened by
the owner.
b. Since the owner and the business are separate entities, each can transact
business separately.
c. The business can buy, sell, enter into contracts, pay liabilities, receive money,
deposit money to the bank, and withdraw money from the bank, and many
others as if it had one personality.

2. Objectivity principle- Sometimes called the reliability principle. In order to be

objective, the transactions should be verifiable by other parties and are properly
supported with pieces of evidence. This is the very reason why a transaction should
have the proper supporting evidence before it is recorded to be verifiable.
3. Cost principle- This principle states that the transactions have to be recorded at the
amount that one has actually paid for.
4. Materiality principle- This principle states that the materiality of an account is a
matter of professional judgment. Therefore, the skill of an accountant judging an
account is essential. However, for academic purpose, we have to consider all accounts-
small or big to be a material account.
5. Matching principle- This principle states that the reason the business earns an
income is that it simply spends. Therefore, for accounting purpose, we will match the
expense incurred to the revenue earned.

For example:
On Jan. 31, 2013, X delivered merchandise to a customer in Quezon City. In delivering the
merchandise with a selling price of PhP20,000, X paid a delivery charge amounting to PhP500.
The customer just received the merchandise, and in February, he paid the company through
X's collector for the purchased merchandise amounting to PhP20,000.

The sales of Php20,000, although collected in February, must be reported in January because
that was when the perfection of sales contract happened. Also, the delivery expenses must
be matched with the revenue earned. Therefore, the expenses of PhP500 and the sales of
PhP20,000 must be reported in the month of January.

6. Accounting period - a period of 12 months. There are two types of accounting period:
a. Calendar period - a period of 12 months which will end on December 31
b. Fiscal period - a period of 12 months which will end other than December 31

FOR EDUCATIONAL PURPOSES USE ONLY

All business enterprises should identify the accounting period they will observe. Their chosen
accounting period shall determine the set of deadlines for financial statement and other
reporting’s to the government, especially to the BIR and the SEC.

7. Revenue Recognition- an accounting principle that determines the specific

conditions under which income becomes realized as revenue or income. Generally,
income is recognized when a specific event occurs, and the income pertaining to it is
measurable. Moreover, income is recognized when the company delivers merchandise
or services to its customers.
8. Conservatism- This is a concept of recognizing expenses and liabilities in the least
amount of time if there is uncertainty of the outcome and certainty of revenue and
assets received. When one has an option to choose several outcomes where the
probabilities are most likely to occur, he should choose the transactions resulting in a
lower amount of profit or a deferral of a profit. Conservatism principle is a guide of an
accountant, but he should use his best judgment to evaluate a situation and to record
certain transactions in relation to the information available at that time.

ACCOUNTING CONCEPTS AND PRINCIPLES

The actual users are the following:

1. Business Owners- The owners of the business enterprise. They are very particular
to what has happened in their business venture and they can only know it by providing
a copy of its financial statements. They can make decisions depending on the report
and its interpretation.
2. Business Managers- Since the work of managers is to direct and control the business
enterprise, they really need the financial statements as reference for their daily routine
business decision-making.
3. Government- The government is also a user of financial statement because it is very
particular with the correct payment of taxes. It uses the company's financial statement
as its basis for checking the correctness of the latter's tax payment. The responsible
government agency is the Bureau of Internal Revenue (BIR). In case of partnership
and corporation, the Securities and Exchange Commission (SEC) uses financial reports
as its basis for control and protection of public investors and creditors.
4. Potential Investors- They usually check first the soundness of the business
enterprise before they plan to invest their money and to assure a fair return of their
investment as well.
5. Creditors- Nowadays, before creditors extend credit to their customers, they check
on the paying capacity of the customers first to minimize doubtful or uncollectible
accounts.
6. Labor Unions- They need the financial statements of the company as their basis to
demand for increase in the salary of their union members.
7. Budget Officers/Accountants/Auditors- Budget officers prepare the company
budget, and they need its financial statement so they can know the progress of its
operation as compared to its plan. With the financial statement, they will be able to
analyze the variances between the budget and the actual.

FORMS OF BUSINESS ORGANIZATION

If you wish to opera business enterprise, you may choose the following forms of business
organization based on how you visualize business as it works for you and as you work for it.

FOR EDUCATIONAL PURPOSES USE ONLY

 1. Sole/single proprietorship- The ownership of the business enterprise is only one.
This usually holds true for small- and medium-sized business enterprises. Proprietor
refers to male owner, while proprietress refers to female owner.
2. Partnership- The ownership of the business enterprise ranges from two to more
persons. This usually holds true for small, medium, and sometimes big business
enterprises. The owners are called partners (whether male or female). They divide
their profit according to their agreement.
3. Corporation- The ownership of the business enterprise ranges from five to more
persons. This usually holds true for medium and big business enterprises. The owner
of this corporation could number even in millions and could come and go since the
ownership will be based on stocks available in the stock market. The generic name of
the owner is called corporator. To be specific, stockholder or shareholder owns a stock
corporation, while member owns a non-stock corporation. The ownership of the
corporation is divided into shares of stock. If the corporation is a listed firm, an
interested investor can buy shares of stocks from stock brokers; if not a listed firm,
the interested investor can buy directly to the office of the corporation. Profits of this
form of business enterprise are in a form of a dividend that is declared by the Board
of Directors.

TYPES OF BUSINESS ORGANIZATION

Opening a business locally or globally could either be in any type of business organization as
enumerated below.

1. Service concern- This is a type of business organization that renders services to their
customers to earn an income. Examples of this are the beauty parlors, repair shop,
security agency, pawnshop, etc.
2. Trading concern- Also called as merchandising concern. This type of business
organization usually buys merchandise and sells to their customers. The owner or the
manager of a trading concern simply adds a reasonable mark up on the cost of the
merchandise purchased. Examples are SM Department Store, SM Supermarket,
Landmark, Robinsons, etc.
3. Manufacturing Concern- This ytpe of business organization usually buys raw
materials and converts them into finished products and are sold in the market.
Examples of manufactures are Marikina Shoe Factory, Hopia Factory, Bakery, etc.

TEST YOUR KNOWLEDGE!

Answer the following questions in a yellow pad or bond paper.

1. What is the importance of Accounting and Finance in the Hospitality and Tourism
Industry?
2. Can Hospitality and Tourism Industry survive without accounting and finance?
3. Create a scenario where you can apply accounting in your daily lives.
4. Illustrate the accounting Process in your own words and give an example.
5. Differentiate the Forms of Business Organization and what is the new law regarding
with the formation of a corporation?

FOR EDUCATIONAL PURPOSES USE ONLY