Front Office accounting Fundamentals

Front Office accounting Fundamentals

FRONT OFFICE ACCOUNTING FUNDAMENTALS

An effective guest accounting system consists of task performed during each stage of guest cycle. During the pre-arrival stage, a guest accounting system captures data related to the type of reservation guarantee and tracks prepayments and advance deposits. When a guest arrives at the front desk the guest accounting system documents the application of room rate and tax at the registration. During stay a guest accounting system tracks authorized guest purchases. Finally, a guest accounting system ensures payment for outstanding goods and services at the time of check-out.

In brief, a front office accounting system:

·        Creates and maintains an accurate accounting record for each guest or non-guest account

·        Tracks financial transaction throughout the guest cycle

·        Ensures internal control over cash and non-cash transactions

·        Records settlement for all goods and services provided

Given below is a brief review of some general concepts of front office accounting:

Accounts

An account is a form on which financial data are accumulated and summarized. An account may be imagined as a bin or container that stores the results of various business transactions. The increases and decreases in an account are calculated and the resulting monetary amount is the account balance. Any financial transaction that occurs in a hotel may affect several accounts.

In its simplest form, an account resembles the letter T and therefore this system is known as T- form of accounting .Charges are increases in the account balance and are entered on the left side of the T which is known as the debit side. Payments are decreases in the account balance which is entered on the right side of the T and is known as the credit side.

Guest Accounts : A guest account is a record of financial transactions which occur between a guest and the hotel. Guest accounts are created when guests guarantee their reservations or when they register at the front desk. The front office usually seeks payment for any outstanding guest account balances during the settlement stage of the guest cycle.

Non-Guest Accounts: A hotel may extend charge privileges to local businesses or agencies as a means of promotion, or to groups conducting meetings, conferences at the hotel. The front office creates non-guest accounts to track these transactions. These accounts may also be called house accounts or city accounts.

Folios 

Front office transactions are typically charted on account statements called folios. A folio is a statement of all transactions (debits and credits) affecting the balance of a single account. When an account is created, it is assigned a folio with a starting balance of Zero. All transactions which increase (debits) or decrease (credits) the balance of the account are recorded on the folio. At settlement, a guest folio should be returned to a zero balance by cash payment or by transfer to an approved credit card or bill to company account.

The process of recording transactions on a folio is called posting.

There are basically four types of folio:

1)     Guest Folio: Accounts assigned to individual persons  staying in the hotel.

2)     Master Folio: Accounts assigned to more than one person or guest room, usually reserved for group accounts.

3)     Non-guest Folio: Accounts assigned to non-guest businesses or agencies with charge purchase privileges.

4)     Employee Folio: Accounts assigned to employees with charge purchase privileges.

Additional types of folios are frequently created by front office management to accommodate special circumstances or requests. For example, a business guest may request that his charges be split between two separate folios, one to record all Room charges, F & B charges and Laundry expenses and another one to record rest of the expenses. Main folio is usually called ‘A’ folio and the second one is called incidental folio.

Every folio should have a unique serial number. First, they serve as unique identification numbers for control purpose and they are also used for indexing purpose.

Vouchers       

A voucher details a transaction to be posted to a front office account..This document lists detailed transaction information gathered at the source of transaction, such as the hotel coffee shop or Bar. The front desk cashier is required to present supporting documents of all the financial transactions recorded in the guest folio. A voucher-which entitles the bearer to certain goods, services, or discounts upon presentation- is a documentary evidence of a financial transaction. For every purchase, the point of sale presents the bill to the guest, receives cash from the guest, and gives a cash receipt to the guest. In case a charge purchase is made , the guest signs the bill and the same is sent to the front desk for posting it into the guest account; the same is given to the guest at the time of check-out.

The types of vouchers commonly used in hotels are as follows :

·        Charge Voucher

·        Visitor’s paid out

·        Cash receipt voucher

·        Allowance/ Correction voucher

·        Transfer Voucher

·        Travel agent voucher

·        Miscellaneous charge voucher

                                       

                                                   

Creation and Maintenance of Accounts

The task of accurately and correctly recording all transactions that affect guest ledger accounts is the responsibility of the front office. Guest folios are created during the reservation process or at the time of registration.  To prepare a folio for use, information from the guest’s reservation or registration record must be transferred to the folio.  Non automated systems commonly used pre-numbered folios for internal control purposes.  Manually posted guest folio cards are stored in a front desk folio tray which is also referred as a bucket. 

In a fully automated system, guest information is automatically transferred from an electronic reservation record or captured at registration and entered into an electronic folio.  One of the major advantages of electronic data processing is that captured data need only be handled once.  By only having to handle data once, an automated system can significantly reduce errors caused by repetitive data handling. 

Charge Privileges:     To establish an in-house line of credit, a guest may be required to present an acceptable credit card or a direct billing authorization at the time of registration.  Charge privilege implies that a guest is allowed credit facility in the hotel.  This may also happen when guest is regular in the hotel or source of reservation is reliable.  Guests with charge privilege are authorized to make charge purchases and these transactions are communicated manually by vouchers or electronically from remote POS locations to the front desk.  Guest who are not extended charge privileges need to pay an advance deposit for accommodations and they are typically called paid-in-advance or PIA guests.  In a fully automated front office accounting system, such accounts are set to a NO POST status.  This means that revenue center cashiers will not be able to post charges to a guest whose account has a no post status.  In a non automated system, a PIA list is manually distributed to all revenue centers. 

Credit Monitoring:     The front office must monitor guest accounts to ensure they remain within acceptable credit limits.  Generally hotels decide an internal credit limit for all guests to whom charge privileges are extended.  Hotel’s internal limit of credit is known as House Limit.

Front office must keep a track of all accounts approaching the house limit.  Such accounts are known as High Balance accounts.  Guests with high balance accounts must be requested to make a partial payment to reduce the outstanding account balance.  In larger hotels, there may be a full time credit manager to review high balance accounts.  In small hotels this responsibility is given either to the front desk manager or to the accounting division. 

Account Maintenance:          A folio is used to record transactions which affect a front office account balance.  Guest folios must be accurate, complete and properly filed since guests may inquire about their account balance or checkout of the hotel with little or no advance notice.  Transaction postings adhere to a basic front office accounting formula.  The accounting formula is :

Previous balance + debits – credits = net outstanding balance

Tracking Transactions

A transaction initiates activity within the front office accounting system.  From an accounting perspective, nothing happens until a transaction occurs. Each type of transaction will have a different effect on the front office accounting system.  Each transaction is communicated to the front office through the use of different types of vouchers.   A transaction can be classified as

1. Cash payment:  Cash payments made at the front desk to reduce a guest’s net outstanding balance are posted as credits, thereby decreasing the balance of the account.  The front office uses a cash voucher/ cash receipt to support such transactions. 
2. Charge purchase:  Charge purchase represent deferred payment transactions.  The guest receives goods and services from the hotel but does not pay for them at the time they are provided.  A charge purchase increases the outstanding balance of a folio.  A charge voucher also known as account receivable voucher is prepared to document charge transactions.  Charge purchase is basically a credit purchase by the guest and charge vouchers are handed over to the guest at the time of check out.
3. Account correction:  It resolves a posting error on the folio.  By definition, correction is made on the same day the error is made, that is, before night audit.  Account correction can either increase or decrease the balance, depending on the error.  A correction voucher is used to document an account correction. 
4. Account allowance:  It involves two types of transactions.  One type of transaction is when an error in posting is detected after the night audit.  Another type is a decrease in a folio balance for such purposes as compensation for poor service or discounts given for dissatisfactory product or service.  An allowance is prepared which usually requires management approval.
5. Account Transfer:  It tends to involve two different accounts and have an off-setting impact on subsequent account balances.  For eg. when one guest offers to pay a charge posted to another guest’s folio, the charge will need to be transferred from the first account to a second account.  A transfer voucher supports this transaction.
6. Paid out:  The difference between a paid out and other types of transactions are that, paid out reflects cash flow out of the hotel, either directly or on behalf of the guest.  These transactions are considered debit transactions, since they increase a folio’s outstanding balance.  For eg, a guest may request the delivery of flowers and the front office at the time of accepting the delivery pay for the flowers as the guest most likely will not leave the money at the front desk for this purpose.  Payment by the front office constitutes a cash advance on the guest’s behalf.  The front office may pay for the delivery on the presumption that the guest will reimburse the front office.  

Internal control

Internal control in the front office involves:

§  Tracking transaction documentation

§  Verifying account entries and balances

§  Identifying vulnerabilities in the accounting system

Auditing is the process of verifying front office accounting records for accuracy and completeness. Each financial interaction produces paperwork which documents the nature and amount of the transaction. For example, consider the transaction that occurs when a guest charges a meal to his individual folio. This transaction will likely be supported by the restaurant’s guest check, cash register recording, and charge voucher. The charge voucher is prepared at POS and sent to the front office as notification of transaction. In a semi-automated front office a front desk agent, in turn, retrieves the guest’s folio , posts the charge purchase transaction, refiles the  guest folio , and files the charge voucher. Later that day, the front office auditor ensures that all vouchers sent to the front office have been properly posted to the correct accounts. In the case of  this example , the auditor will match the front office total of charges from the dining room to the total reported by the dining room. Discrepancies  in accounting procedures are easy to resolve when complete documentation is readily available to substantiate account entries.

Front office cash sheet

The front office is responsible for a variety of cash transactions which may affect both guest and non-guest accounts. Proper cash handling procedures and controls must be established, implemented and enforced.

Most non-automated or semi-automated operations require front office cashiers to complete a front office cash sheet that lists each receipt or disbursement of cash. The information contained on a front office cash sheet is used to reconcile cash on hand at the end of a cashier shift with the documented transaction which occurred during the shift. A front office cash sheet provides separate columns to record transactions affecting guest accounts, non-guest accounts , and miscellaneous transactions.

The most common entry on a front office cash sheet is the money collected from departing guests during check-out. When guests pay on their accounts , the cashier typically records the amount paid ,the room number ,and the folio number on the front office cash sheet.

The front office cash sheet also provides space for itemizing cash disbursements or paid outs. These are the transactions when front office pays on behalf of the guest. Since the amount of cash on hand at the front desk will be lowered by the amount paid to the recipient , the front office accounting system must be capable of tracking this type of transaction.

Audit Controls:  

A number of front office audit controls ensure that front office staff  properly handle cash, guest accounts, and non- guest accounts. Publicly held lodging companies are required to have their accounting records audited yearly by independent certified public accounts. In addition, companies may have their own internal auditors for control purpose. In both the cases a report is prepared for ownership and management.

Cash bank: 

Cash bank is also known as float or imprest.  It is an amount of cash assigned to a cashier so that he can handle the transactions that occur during a particular work- shift.  Good control procedure generally require that cashiers sign for their bank at the beginning of their work-shift  and that only the person who signed for the bank have access to it during the shift.  At the end of a shift, each front office cashier is solely responsible for depositing all cash [including foreign currency] and all negotiable instruments [such as paid out vouchers] in a specially designed front office cash envelope.  The cashier normally records the contents of the front office cash envelope on the outside of the envelope before dropping it into the vault.  From an internal control perspective, at least one other employee should witness this procedure and both of the employees should sign a log attesting the drop was actually done and stating the time of the drop.

Monitory differences between the money placed in the front office cash envelope and the cashier’s net cash receipts should be noted on the envelope as overages, shortages or due banks [ also known as due backs].

An overage occurs when after the initial bank is removed, the total of cash and negotiable instruments in the drawer is greater than the net cash received.  A shortage occurs when the total of the contents of the drawer is less than the cash receipts.  A due-bank occurs when a cashier pays out more than his bank and he does not have enough cash in the drawer for the cash drop.  They are generally unusual in the front office. 

Bank is restored to its original value at a fixed time during the day by the general accounts department. 

Check-Out Options

Changes in technology and guest needs have prompted front offices to develop alternatives to standard check out and account settlement procedures.  These options combine advances in technology with special guest services to expedite departure activities. 

Express Check out:                 Guests may encounter long lines at the front desk when trying to check out during prime check out period.  To ease front desk volume some front offices initiate check out activities before the guest is actually ready to leave.  A common pre departure activity involves producing and distributing guest folios to the guest expected to check out.  Front office staff may quietly slip printed folios under the guest room doors of expected check outs, making sure that the guest’s folio cannot be seen or reached from outside the room.  In this process, guest must an express check out form at the time of registration or during his stay.  Express check out is possible only if the guest is settling is his bill using his credit card.  By completing an express check out form, guest authorizes the front office to transfer his outstanding folio balance to his credit card account/credit card charge slip which was created during registration.  Such guests after verifying their folio may just sign it and leave it at the front desk before departing from the hotel.  After the guest has left, the front office completes the guest’s check out by transferring the outstanding guest folio balance to a previously authorized method of settlement.  Any additional charges the guest makes before leaving the hotel will be added to his folio.  Due to these possible late charges, the amount on guest folio may not equal the amount charged to the guest on his credit card account.  This possibility should be clearly stated on the express check out form to minimize later confusion. 

Self Check Out:   In some hotels, guests can check themselves out of the hotel by accessing self check out terminals in the lobby area or by using an in-room system.  Self check out terminals or in-room systems are connected with the front office computer and are intended to reduce check out time and front desk traffic.  Self check out terminals vary in design.  Some resemble ATM machines, while others possess video and audio qualities. 

To use a self check out terminal the guest accesses the proper folio and reviews its contents.  Guests may be required to enter a credit card number by using a keypad or by swiping the credit card through a magnetic strip reader attached to the terminal.  Settlement can be automatically assigned to an acceptable credit card and a zero balance folio gets printed out.  A self check out system should then automatically communicate updated room status information to the front office department.  The front office system, in turn, relays room status information to the house keeping department and initiates action to create a guest history record. 

In-room folio review and check out usually relies on the television set provided in the room with a remote control.  The guest can confirm a previously approved method of settlement to the in-room television which is connected via computer to the front office.  The front office computer directs the self check out process.  Guests can pick up a printed folio copy at the front desk on their way out.  Another advantage of this system is that guests can look at their folios at any time during their stay without having to stop by the front desk.