In order to understand something, you must go to its roots.

1. Hotel Front Office Accounting: Concept Notes
Accounting may be simply explained as the systematic
recording of give (buy) and take (sell) transactions that are
financial in nature. In any transaction there are two parties that
agree to an exchange of goods or services, getting paid
through money in return. All human interactions are based on
this give & take, quid pro quo!
To make this idea even more clear, let us understand the
concept of barter. Before the invention of money or any other
medium of exchange, two persons agreed to exchange one
thing for another, in order to fulfill all their needs and wants.
For example, exchanging rice for milk; exchanging two goats for
one cow; exchanging gold for a house etc.
The barter system of exchange worked well for centuries
till disputes started happening due to an increase in the range
and number of commodities, goods, and services that could be
exchanged. Haggling, bargaining etc. in the market place
increased and fights became frequent. Many deals were simply
cancelled because mutual agreement wasn’t achieved. Then
precious metals, like gold and silver, in addition to gems,
started being used to help in barter exchange.
The invention of money, coins and currency notes have made it
possible to fix the worth, or value, of everything in terms of
money. In science, we call it standardization. Within the
boundaries of one country, only one currency is accepted and
for internal, domestic trade this is sufficient. For international
trade between two countries, having two distinct currencies; a
system of exchange rate has been devised. The value of
national currency is assigned depending on which country has
a larger economy and bigger gold reserves.
Gold still remains the final determiner of wealth of
nations, companies and individuals.

2. This introduction may seem to be too long and unnecessary but
in my opinion, it is intended to give a sense of understanding
regarding money, business, trading, worth of goods and
services; and inherent possibilities of disputes, conflicts
residing in each transaction. The apparent ongoing conflict
between the United States of America and Republic of China is
an example of difficulties in trade at all levels. The subject
which deals especially with this aspect of human life is called
Economics.
I would like my students to learn hotel front office accounting
from this perspective of conflicts, disputes and trading
(business) so that they are in the best possible position to
understand the fears of each and every person/party involved
in all transactions. If you know the motivations of people in your
life, you can handle them better.
Primarily, following are the important stakeholders (people who
have invested something in the business, not always in money
form) to the accounting system and procedure within a hotel
environment;
1. Hotel owners and shareholders (main investors)
2. Guests (pays money)
3. Managers (manages business and gets money)
4. Employees and staff Unions (salary & wages, collective
bargaining negotiations with owner/manager)
5. Government and ruling party ideologies (Conservatives
versus liberal, Left vs. Right etc.) (gets taxes, provides
security and infrastructure, also governance)
6. Vendors and suppliers to the hotel, Association of vendors
and suppliers (get revenue, negotiations on rates and
contracts)
7. Hotel associations (negotiations with government, other
sectors of tourism)
8. External and government auditors (prevents
misappropriation of funds)

3. 9. Local city/ town administration (get local taxes (octroi),
provides licenses, services etc)
If you are wondering at this long list of stakeholders, let me clarify
that a large luxury hotel; or even a budget hotel, is a source of
income/ revenue for all the stakeholders mentioned above.
Some may derive all their sources of sustenance (income) from
hotel only, whereas others may have multiple sources of
income/ revenue. It is natural that those who completely
depend on the hotel for their survival and sustenance will have
greater need of expecting and ensuring transparency in all
accounting transactions & procedures. Failure may prove to be
life threatening due to loss of regular earnings.
Accounting is critical to survival because it protects a very scarce
resource i.e. money.
There are three systems that a hotel may adopt for recording of
transactions;
A. Manual
B. Semi automatic
C. Fully automatic
Please don't underestimate the manual system as being primitive
and inefficient. The evolution from manual to fully automatic
systems has been made possible with the introduction of
technology in hotel business, and each system newly
developed is based on the previous systems. This is why the
students are still taught the manual system of accounting first;
even though most hotels have now moved to fully
computerized systems. The checking of all financial
transactions is still carried out physically/manually in even fully
automated hotels. To get a better understanding of accounting
fundamentals, I request the learners to spend at least one
week in the night audit department during the internship at
hotels.
The fundamental concepts of accounting remain the same in all
the three systems.

4. Now, let us discuss some very important (in my humble opinion)
terms from hotel front office accounting, and their
meanings, interpretations etc.
1. Transactions; and types of transactions in a hotel
2. Recording of each transactions on specified vouchers
3. Account folio
4. Account postings
5. Debit and credit
6. Account balance
7. Charge privilege and charge purchase
8. Zero-out or settlement of accounts
9. Modes of settlement
10. Deferred, or delayed payments
11. Account audit
12. Cash control
13. Credit control
Transaction has already been described before and most of the
readers are already familiar with the word, bank
transactions, debit card transactions and account statements. Let
us use a simple example to understand transactions in the hotel
industry. The most prominent hotel product is the room for
accommodation. A hotel room has two saleable aspects; a well
defined livable space, (including the floor size/area) and time
measured in hours or days. The hotel fixes some money value
that the buyer of a room needs to pay, in exchange for being
entitled to occupy a well defined space for a pre decided measure
of time. When a guest reserves a hotel room and finally pays for
it, it indicates that a transaction has occurred and completed.
There are three types of transactions in a hotel front office;
1. Cash transactions
2. Credit transactions
3. Payments, (pre- and post-transactions).

5. Cash transactions are those purchases that are made by the
guest at various points of sale within the hotel and the payment
for each transaction is made with the help of cash.
Credit transactions are not paid for immediately. The guest
prefers to pay for all transactions at the end of the stay. Such
transactions are documented and certified/ verified by asking the
guest and one employee to affix their signature on that document.
This document that has recorded a credit transaction is forwarded
to the front office department of the hotel. After receiving a
number of such credit transactions from all the guests, these
documents are used as a reference for posting/recording/writing
into the main guest bill.
Payment transactions are different from cash transactions in one
sense that the payment is not made for a single transaction but a
collection of transactions. In hotels, they may be called advance
payments or final settlements.
Recording transactions is important due to the fact that a hotel
will have thousands of transactions each day and it is impossible
to keep track of so many transactions unless a record is created
every time a transaction takes place.
The document specifically assigned to record each transaction is
called voucher. The voucher is made from the English word
vouch which means giving personal assurance or guarantee for
someone or something. The signature on the voucher is the
guarantee of the guest that he will pay for it. The signature of the
employee is a guarantee of the hotel that the guest will receive an
error free bill.
Vouchers are of many types but basically they perform one of the
two functions; they either increase the account balance or
decrease it.
An account is a summary of all the transactions that take place
between the guest and the hotel. Therefore each guest account
would have two columns. One column records credit purchases
and the other column records payments.

6. The two columns have been assigned particular names; debit
and credit.
The column with the heading debit includes those transactions
where the guest owes money to the hotel. The credit column
includes those transactions where the hotel owes money to the
guest. For example, if the guest has made an advance deposit
then this money hotel owes to the guest. Later on when the guest
is checking out and the account is being settled, this advance
payment money is adjusted against the total of charge purchases
made by the guest.
Account folio is a formatted, numbered, colour coded and closely
guarded document. A folio is the place where all the transactions
between one guest and the hotel are
recorded, summarized, verified/ audited and finally settled. Folios
are numbered to prevent misuse and misplacement. They are
colour coded because multiple copies are prepared for each folio.
For example, Hotel copy, guest copy, credit card company
copy, stationery or book copy. Folios are closely guarded
because employees may misuse them by offering an exorbitant
discount to the guests if they agree to pay in cash. This will cause
serious loss of revenue not just to the hotel owners and
shareholders but also cause loss in tax revenue to the
government. All the cash will be kept by an individual or, a group
of employees working in cohort.
Account posting is an activity of carefully posting all the day's
transactions of the guests/visitors into the folio it belongs to. After
making entries for all the charge purchases, the final balance for
the day is also entered in the process of posting.
Debit and credit are like two bins, or baskets, that help the hotel
to sort each transaction correctly. In this way all debit side entries
can be made together.
Account balance may really be understood if you visualize the
account and the folio as an actual weighing balance. On one side
are loaded the debit transactions and on the other, the credit
transactions. Whichever side shows greater weight (amount), the

7. folio is said to be carrying that balance. For example, if the total of
the debit side is more, the folio or account is said to have a debit
balance. In this case, the guest owes money to the hotel. Now
just think for a moment and ask yourself which balance is
preferable from hotels point of view; Debit balance or credit
balance? Relate this question to the idea of skipper!
Charge privilege is a unique feature of hotel business. Guests
often stay in hotels on multiple days and incur (have) a lot of
transactions. Making payments for each transaction separately is
highly inconvenient and inefficient for both guest and hotel. To
avoid this, hotels have devised an accounting system where all
the credit card carrying guests will be extended a line of
credit, after the hotel has taken permission/ approval of the bank
for a large amount. How high this amount will be depends upon
the guest’s level of monthly income. This limit on maximum
expenditure imposed by the bank on each credit card holder is
called the floor limit. Hotels impose their own expenditure limits
on each guest and it is called house limit. Naturally, the house
limit is always less than the floor limit.
The guest is entitled to buy from any revenue centre within the
hotel on credit, by just affixing his signature on the voucher raised
by that department. This facility is known as charge privilege.
Zero out is the name of the final transaction that renders the
balance in each account to the sum of zero value. What that
means is that their account will have neither any remaining debit
balance nor credit balance. For example, if the guest has been
given house limit of
Rs. 2, 00,000/- And the total of all his charge purchases are Rs. 1,
9 0,000/-, the cashier will refund an amount of rupees 10,000/-, by
making an entry on the debit side of the account, and bringing the
outstanding balance to zero. If the guest clears his bill and all
dues on it, at the checkout stage, the bill is said to have been
settled. This is why settlement is also known as zero out.
Modes of settlement are easy to understand. These are the most
frequently used methods chosen by the guest to pay for their

8. hotel bills. Following is a list of some commonly used methods of
payment at modern luxury Hotels;
 Credit Cards. As a global payment solution, credit cards are
the most common way for customers to pay online. ...
 Mobile Payments. ...
 Bank Transfers. ...
 E-wallets. ...
 Prepaid Cards. ...
 Direct Deposit. ...
 Cash.
Deferred or delayed payments are the ones where the account
is not settled/ zeroed out at departure. Some of the cases where
the bill isn’t cleared at departure are;
The guest is from some company and his visit is sponsored by
his company. This category of guests are called BTC, bill to
company. These guests carry with them a letter of authorization
that mentions the room and food entitlements of the official.
The second situation of deferred payment may occur if the guest
has made his reservation with the assistance of a local travel
agent’s office. In this case the guest pays the entire sum of
money in advance to the travel agent. In exchange the travel
agent issues a voucher, TAV, detailing the room reservation and
any other services. This voucher is produced at check in and the
hotel allows the guest to use the hotel facility. Upon departure the
guest affixes his signature on the travel agent’s
voucher, confirming having received the services from the hotel
as detailed in the travel agent’s voucher. This voucher is then
forwarded by the hotel accounts department to the travel agent
who directly pays into the account of the hotel after deducting his
commission for his services. It is natural that hotels accept
vouchers only from government recognized and authorized travel
agents. Any complaints against a travel agent may also be made
with the official Association of travel agents in that country.

9. The third situation of deferred payment occurs when the guest
decides to use a credit card as his preferred method of payment.
As described before, the hotel sends the details of the credit card
electronically to the bank, gets approval and guarantee for a
certain amount. Upon departure the guest will affix his signature
on the credit card voucher as proof of having used the services at
the hotel. The hotel will then send his bill along with all the
supporting vouchers, documents to the bank for payment. The
bank deducts the applicable merchant’s commission and credits
the remaining amount to the account of the hotel directly. It is very
clear from this explanation that the credit card is the most
convenient form of payment for hotels.
Account audit is in simple words an examination of each and
every financial record generated during a business day. The
purpose of the audit is to avoid errors, detect frauds, calculate
exact commissions and allow the hotel to receive accurate
revenue into its account. In hotels audit is possible only when the
transactions either completely stop or become very slow. In
almost all hotels this happens only during the period after
midnight and before early morning. It is for this reason that the
audit in hotels is referred to as the night audit. Night audit is a
separate chapter that will require greater concentration from the
learner to master the basic concepts.
Now finally we have reached the concluding stage of this concept
note. We shall now discuss cash control and credit control. In
the beginning of this concept notes, we tried to understand why
disputes and conflicts arise in all types of transactions. Disputes
occur when anyone of the two parties believe that they have not
received their rightful dues. The buyer is unhappy about not
receiving goods and services as promised. The seller on the other
hand thinks that the amount they have received as payment is not
enough. The situation in hotel is even more complicated because
we have employees (third parties) who are recording
transactions, verifying them and collecting them on behalf of the

10. hotel owner. If any one of them becomes dishonest, the impact
on hotel business could be disastrous.
To overcome the weaknesses in the accounting system all hotels
establish a monitoring, controlling and correcting system for cash
and credit transactions. These two systems are known as cash
control and credit control. cash control and credit control is also a
separate chapter like night audit and all future managers must
understand, internalize and start applying these control principles
in their day to day professional life; so that when the time comes
to actually handle the great challenges, they will be ready for
them.
I shall leave you with a question that you must answer yourself.
“What can a manager do if he finds out that her owner is corrupt,
not willing to pay taxes to the government honestly? What an
employee can do if he discovers that his manager is corrupt, only
interested in secret commissions and frauds? What can a
business owner do if he discovers that the government officials
and ministers are corrupt, who demand personal gratifications at
the cost of the taxes, environment and societal values?”
Ethics in business is a blind alley.
Your long road to wisdom starts from here.
I am still walking and searching for the answers…
Presentation by Praveen Jha
Senior Lecturer
Institute of Hotel Management, Hajipur Patna Bihar
Date: 1st September, 2020