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10.1: In the Beginning...

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    11106
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    Though accounting and finance departments are similar from the perspective that both deal with money, the purposes of each department are clearly distinguishable. 

    The modern mechanics of accounting was first published by Luca Pacioli in the late 13th Century. The ingenuity of modern accounting is that the accounts are designed to balance when the total asset accounts equal the sum of total liability accounts plus stockholder equity accounts. It is an eloquent theory that all things that the company owns plus what others owe the company equal to what the company owes to other businesses and the funds inventors have put into the company. 

    The main purpose of a hospitality accounting department is to identify how well the business is doing financially by recording and reporting the activities the business has received or provided to other companies. In other words, an accounting department creates a report card for the company based on a systematic, auditable, business system. Professionals in a hospitality accounting department help the company track business activities. Thus, the main component of accounting in hospitality is to properly record all economic business transactions in the clearest and most ethical way possible. 

    The final product from an accounting department is financial statements which are reports including the Balance Sheet, Income Statement, Retained Earnings Statement, and Statement of Cash Flows. These financial statements are then reviewed by qualified internal and external auditors to examine and verify that the financial statements properly reflect the business activities according to Generally Accepted Accounting Principles (GAAP). In terms of the hospitality sector, key transactions include short-term receivables, short and long-term debt service, payroll, long-term assets (buildings, property, equipment, etc.). 

    The objective of the finance department is to maximize the owner or investors’ return. More specifically, hospitality organizations employ finance professionals to identify investment opportunities and track their returns. This would include forecasting current and future business profitability using financial models, budgeting future expenses, and securing funding sources to finance strategic projects.    

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    In terms of forecasting current and future business profitability, some financial models use historical financial statement accounts to analyze the company’s health and financial structure. Another approach is to create a proforma income statement that identifies expected future sales and expenditures. More sophisticated models incorporate statistical-based causal analysis, also known as regression analysis, to identify a relationship between two existing variables. For instance, if a company wants to identify the relationship between sales and managers’ income, a regression model would be used. In addition to regression, other non-linear models focusing heavily on increasing predictability are used in today’s world of hospitality. Such models include machine learning models, in which a computer-generated algorithm is used to provide the best predictable outcome. 

    For budgeting, companies use Zero-based budgeting which provides a detailed report on each department’s monthly expenses and allocates new investments across relevant departments. Other types of budgets are used depending on the situation. A master budget is a plan that governs the overall company expenditures for the whole year. An operating budget identifies day-to-day expenses within the business such as material costs, labor, and other operating expenses. Variance analysis is used to compare the actual income and expenses to the budget plan to determine if there is a favorable or unfavorable variance.

    Finally, a hospitality organization's finance department will make suggestions on how to secure external funding from other parties, also known as financing. This is related to finding investors and/or creditors to fund new and existing business activities. Whether a company chooses to borrow money from creditors or find new investors depends on the company’s current financial structure and the available financing terms. 


    10.1: In the Beginning... is shared under a CC BY-NC license and was authored, remixed, and/or curated by LibreTexts.

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