Business Finance

A Detailed Guide To Hotel Accounting

Jul 20, 2022 • 10+ min read
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Table of Contents

      All businesses in the United States follow the same fundamental accounting principles, but their application varies between industries. Because the hospitality industry has some unique financial quirks, hotel accounting can be particularly intensive.

      If you’re a hotel owner, here’s what you should know about accounting for your business, including what separates it from accounting in other industries, the most significant obstacles you’ll face, and some best practices that can minimize your issues.

      How Is Hotel Accounting Different?

      The fundamental challenge of accounting for hotel operations is relatively straightforward. In simple terms, there’s much more financial data to document, organize, and analyze in the lodging industry than in most others.

      The rules aren’t any more sophisticated than usual, but running a profitable hotel business often requires managing many different income streams and a diverse set of expenses.

      While room rentals are a hotel’s primary offering, their supplemental revenue streams can still be significant. They often have their own unique costs, and running them may require accounting for them separately.

      In addition, hotel activities are virtually endless and generate transactions every day of the year. Unlike other businesses that close at the end of the day and shut down entirely for a couple of days a week, hotels do business at all hours and every day of the year.

      As a result, everything from maintaining organized, accurate financial records to analyzing operational data for decision-making purposes becomes significantly more difficult.

      Accounting Challenges Faced By Hotels

      Ultimately, the primary challenge of hotel accounting is establishing systems that can effectively organize and analyze the overwhelming amount of data involved. To help you tackle the problem, here’s a more in-depth explanation of the factors contributing to it.

      Ceaseless Operations

      One of the most significant contributors to the challenge of hotel accounting is that hotels rarely close. In most cases, hotels are open for business 24 hours a day, 365 days a year.

      After all, their primary offering is a place for people to stay, and there’s always demand for it. Demand is often even higher on holidays when many other businesses are closed since people tend to travel away from home around those days.

      As a result, hotels have new transactions to deal with daily, which creates a constant strain on the staff members responsible for maintaining financial records. For example, this typically necessitates a “night audit.”

      Now a standard in the hotel industry, the night audit is an after-hours process that involves confirming room statuses, documenting no-shows, reconciling guest transactions, and everything else necessary to close the books for the day.

      Multiple, Unrelated Activities

      Hotels generate the vast majority of their revenues by renting out their rooms. However, many of them have multiple additional income streams that range from tangentially related to completely separate from their primary offering.

      For example, hotel revenues can come from room rentals, room service, meeting space rentals, on-site restaurant and bar sales, valet and parking charges, vending machines, spa and massage services, gift shops, in-room minibars, movie rentals, and more.

      It might not make sense to account for all of these activities separately. However, if a few are significant enough to impact profitability, it’s often worth breaking out the related transactions to help managers handle them effectively.

      For example, a hotel with a popular on-site bar would need to keep track of its revenues and expenses separately to maintain the supplies necessary to maximize profitability and operational efficiency.

      Varying Room Rates 

      Setting room rates is one of the most unique and complex aspects of hotel accounting. Though software exists that can organize the necessary data and help with the challenge, it’s not perfect, and human input is still often needed.

      Once again, the sheer scope of the data to consider is what makes this so challenging. For example, all of the following have some impact on the ideal price of your hotel rooms:

      • Seasonality
      • Days of the week
      • Competitor prices
      • Customer expectations
      • Current occupancy rate
      • Minimum price to cover costs

      Accounting for all these variables while setting prices is a delicate process, even for experienced hoteliers using hotel management software. Setting prices too high can scare off customers, but setting them too low means leaving money on the table.

      Complex Payroll Costs

      Few businesses have a staff as diverse as the army of workers that hotels need to employ to function effectively. For example, even a small hotel with simple amenities and offerings would need to hire all of the following:

      • Front desk staff
      • Housekeepers
      • Security
      • Management
      • Valets
      • Culinary staff

      In addition to the many different functions they need to fulfill, these workers often have vastly different compensation formats. Hotels usually have both full-time and part-time workers, with some receiving tips and others not.

      Unfortunately, hotels need to account for these labor costs accurately and timely so their managers can staff effectively. Otherwise, they risk wasting money by overstaffing for slow periods or overwhelming employees by understaffing in busy times.

      Increased Managerial Accounting Requirements

      Another reason accounting can be more challenging for hotels than other businesses is that there’s a greater need for managerial accounting processes in the hospitality industry.

      Managerial accounting involves organizing your financial reporting in a way that helps managers make intelligent business decisions, and it’s essential for hotels. They need financial information to set room rates, hire staff, and determine budgets.

      For them to do so effectively, you can’t lump your hotel’s activities together. It obscures the numbers relevant to individual income streams, and hotel managers need more specific accounting data than revenue and expense totals.

      As a result, a significant portion of hotel accounting involves matching transactions to the correct activities so managers can generate the financial reports they need to make intelligent choices.

      Best Practices For Hotel Accounting

      Hotel accounting can be challenging, but you can mitigate many of the most troublesome issues with preparation, organization, and automation. Here are some best practices you should follow to ensure your accounting system is as efficient as possible.

      Choose An Accounting Basis Carefully

      Hotels can choose between using the cash or accrual methods of accounting. Both have pros and cons, but the best option depends primarily on the size of your operation. If you choose incorrectly, you could cause yourself significant accounting issues later.

      The cash method involves recognizing revenues when you receive payments and deducting expenses when you pay them. It’s generally easier to implement, but it’s also the less accurate of the two.

      It generally does a better job of measuring your company’s cash flows than its actual profitability. As a result, it’s usually only suitable for small hotel businesses like bed and breakfasts.

      Meanwhile, the accrual method involves recognizing revenues when you earn them and deducting expenses when you incur them. It also requires that you keep track of your accounts payable and receivable.

      These additional complexities make it harder to execute, but accrual financial statements paint a more accurate picture of your business’s profitability and financial position. Managers, investors, and lenders all prefer them for that reason.

      As a result, accrual accounting is often better for larger, more sophisticated hotel businesses. Keep that in mind if you plan to scale your hotel operation up over time.

      You might want to use the cash method at first, then change to accrual as you grow, but switching can be difficult. If you plan to use accrual eventually, it may be better to do so from the start.

      Take Advantage Of Software

      Bookkeeping can be one of the most intensive aspects of hotel accounting. Theoretically, it involves the least amount of critical thinking, but the volume, diversity, and unending flow of transactions make it difficult to handle the function manually.

      As a result, accounting software is essential for tracking your hotel’s activities efficiently. However, while generic tools are effective for many small businesses, they may not meet the complex requirements of many hotels.

      The more your business grows, the more likely you’ll need advanced industry solutions. For example, if you’re running a group of hotels, you’ll need a property management system that can handle all of your locations from a single dashboard.

      Fortunately, many hotel accounting software options exist with a broad range of capabilities. The right accounting solution will depend on your tech stack, level of sophistication, and growth expectations, so explore your choices thoroughly.

      If you choose a less comprehensive option to keep the cost down, you may need to supplement it with additional tools, such as payroll, booking, or point-of-sale software. Keep those extra potential expenses in mind as you shop.

      Optimize Your Night Audit

      Hotels usually need to perform nightly audits to ensure the accuracy of their complex financial records. These involve taking steps like confirming room statuses, posting room charges, and preparing financial management reports.

      Because these audits are a daily occurrence and critical to the success of your accounting function, it’s worth taking the time to optimize them. Otherwise, they can become one of the most tedious and time-consuming aspects of your business.

      To make the process as efficient as possible, consider doing the following:

      • Systematizing your night audit training
      • Documenting step-by-step instructions for the process
      • Training multiple employees to complete night audits
      • Investing in software to automate the audits as much as possible

      Because these reconciliations need to happen nightly, you don’t want to rely on one accounting team member to complete them. They won’t be available every day of the year, but your hotel has to be.

      In addition, you want it to be relatively easy to train someone new to complete the process. Otherwise, losing one or two key team members could cripple your accounting department.

      Get Expert Help 

      Almost every business can benefit from expert accounting services, and hotels are no exception. Running a hotel is more than a full-time job, so you’ll probably need to pay others to handle your business’s more sophisticated accounting needs.

      In addition to the accounting manager responsible for recording daily transactions and other bookkeeping activities, it’s best to get assistance from a Certified Public Accountant (CPA) knowledgeable in hotel accounting services.

      In addition to verifying the accuracy of your balance sheet and income statement, they can provide personalized tax planning, cash flow and financial analysis, budgeting, and forecasting services.

      One of the best ways to get these kinds of accounting services without paying for another full-time hotel accountant is to hire an outsourced CPA firm. Just make sure you choose one with experience in the unique challenges of hospitality accounting.

      *The information provided in this post does not, and is not intended to, constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter.

      About the author
      Nick Gallo, CPA

      Nick Gallo is a Certified Public Accountant and content marketer for the financial industry. He has been an auditor of international companies and a tax strategist for real estate investors. He now writes articles on personal and corporate finance, accounting and tax matters, and entrepreneurship.

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