Jagannath Institute of Management Sciences Lajpat Nagar BBA.HMTCT-IV-SEM Hotel Accounts Profit to a business is like food to human body�(W.C.F. Hartley). So every business entity�s main aim is to earn a maximum amount of profit from the business. For achieving this aim every business entity enters into various types of business transactions with many persons and entities. For example, 1. A restaurant purchases groceries , fish, milk etc by paying in cash. 2. It prepares various dishes out of the items purchased by it. 3. It pays wages or salary to cook and stewards. 4. It serves the dishes to customer who pays for it. All the above activities are transactions of the restaurant with the object of making profit. Most of these transactions involve money and hence are called monetary or economic transactions. For example in the aforesaid case , transaction 2 is not a monetary transaction as it does not involve money , whereas all the other transactions are monetary transactions. To find out how much profit has been earned from the business for a particular period all these monetary transactions are to be recorded systematically in the books of accounts. Similarly to know what amount is due from or due to any person or entity as on a particular date can also be found only if these transactions are recorded systematically. So, book-keeping was introduced to have permanent and systematic record of business transactions that would help a businessman to know easily his business transactions, and the profit and financial position i.e. how much is due to him from others and how much he has to pay to others. Hence, hospitality or hotel industry also being one of the profit seeking business needs to keep track of its economic transactions by book-keeping and accounting. Objectives After studying this unit, you will be able to understand: � Definition and Meaning of book keeping � Functions of book keeping � Meaning and definition of accounting � Features of accounting � Difference between book keeping and accounting � Advantages and disadvantages of accounting � Basic Accounting terms � Basic accounting equation � Double entry system of book keeping � Classification of accounts � Rules or principles of debit or credit 1.2 Definition and Meaning of Book Keeping Book-keeping is a part of accounting. So, its very important to have some knowledge about book keeping, before we find out what is accounting. �Book-Keeping is an art of keeping accounts in a regular and systematic manner.� This means that business entity has to record each and every transaction or event in such a way that exact picture can be emerge whenever needed. According to Northcot �Book Keeping is the art of recording in the books of accounts the monetary aspect of commercial and financial transactions� According to A J Favell, �Book Keeping is the recording of the financial transactions of a business in a methodical manner so that information on any point or in relation to them may be quickly obtained�. According to J R Batliboi �Book Keeping may be defined as the science as well as the art of recording business transactions under appropriate accounts� From the above definitions, it is clear that book-keeping is the process of recording business transactions in proper books of accounts in a systematic manner. 1.2.1 Features of Book Keeping 1. It is concerned only with the recording of business transactions. For example, a restaurant owner will not record his personal or household transactions in his books of account. 2. It is concerned with the recording of only monetary or financial or economic aspects of business transactions. For example, a restaurant cannot record transaction No 2 in its books of account mentioned in page 2 as it is not a monetary transaction. 3. It is the recording of business transactons in terms of money. Thus transactions which cannot be expressed in terms of money cannot be recorded in books of account. For example, additional hours of work voluntarily provided by an employee of your restaurant cannot be recorded in the books of account as you are not going to pay any wages for him for such additional hours, though such additional hours of service might give you extra profit. 4. It is recording of business transactions in a systematic manner usually on daily basis. 5. It is recording of business transactions with the purpose of finding out financial position and profit or loss of the business. 6. Scope of book keeping is narrower than accounting, because it is concerned only with the recording of transactions. Self Assessment Questions 1. Define Book Keeping. 2. Give any two features of book keeping. 1.3 Definition and Meaning of Accounting American Institute of Certified Public Accountants (AICPA) has defined accounting as �the art of recording, classifying and summarizing, in a significant manner and in terms of money, transaction and events which are in part at least, of financial character, and interpreting the results thereof�. Hence accounting includes book-keeping i.e. recording of transactions and many more processes regarding which we shall study later. According to American Accounting Association (AAA), �Accounting is the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information�. This definition also identifies some processes undertaken in accounting. But it goes one step further in stating that information obtained through accounting is required for required for decision-making by users of that information. For example, a hotel might be recording all its monetary transactions systematically. What is the use of such book-keeping unless the owners do not how much they spend every week or month on various categories of expenses like food and beverage, housekeeping? They would not be able to take any decisions without the knowledge of such information which is churned out only through accounting. Thus, these two definitions give complete meaning of the term �accounting�. So, accounting is identifying, measuring, recording, classifying, summarizing business transactions, analyzing the results thereof, and communicating the results of the interpretations to the end-users for decision-making. Let us find out some of the processes which are undertaken in accounting 1.3.1 Functions of Accounting i. Identifying Identifying business transactions to be recorded in the books of account is an essential aspect of accounting. Identifying means determining whether a transaction is a business or financial transaction that is to be recorded in the books of account. For example, if a hotel provides laundry service to a guest at the hotel it has to identify this transaction is one which is to be recorded in the books of account as the guest has to make payment for the laundry service when he is checking out. ii. Measuring Measuring means expressing the value of business transactions in terms of money. Continuing the aforesaid example the hotel must arrive at the amount that is to be recorded in the books of account before it actually records the transaction. iii. Recording We have studied that recording transaction is also called as book-keeping. Recording the business transactions as and when they occur is done in the original book of entry called journal. Recording of transactions is done through journal entries. Such recording should be systematic and regular and based on certain rules regarding which we shall study later. iv. Classifying Classifying refers to the grouping of transactions of similar nature together. For example, from your records of a restaurant maintained on daily basis, you can pick out transactions pertaining to salary paid to your employees, egg purchases or soft drink sales for a particular period, say, a month. Instead of picking out such items as and when you like, you can regularly classify them while recording the transactions. This helps you to get more meaningful information from your transactions. The classification is done an accounting book called ledger regarding which we shall study later. v. Summarizing Summarizing means summarizing the effect of the business transactions classified. For example, it is not enough if you know how much salary you paid in a month or how much fish purchases you made in a year. What you require, as has been stated earlier is the information as to whether you made a profit or loss and whether what you have on particular day is more or less that what you owe to others. Summarizing function of accounting achieves this by providing financial statements like Profit and Loss Account and Balance Sheet more about which we shall study later. vi. Analysis and interpretation Analysis and interpretation means rearrangement of the information found in the financial statements in a suitable manner, and drawing meaningful conclusions about the profit, the financial position and the future prospects of the business. For example, even after you have come to know what is your profit, you might require information like how much profit you made before paying interest on loans you have taken or taxes you have paid. To find these types of information analysis of financial statements is necessary. vii. Communicating Communicating means communicating the end results of interpretation of financial statements to the internal and external end-users for decision making. Thus accounting is process of identifying, measuring, recording financial transactions, classifying, summarizing and analysis and interpretation of result and communicating results to end users. 1.3.2 Accounting Cycle The functions of accounting mentioned above are to be undertaken in a