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Setting Up Your Books:
An Overview of Inn Accounting and Bookkeeping
By
Hugh A. Daniels, BS, MBA

While you are busy looking at properties, considering what decor you might want, what should the name be, should we incorporate, dreaming of that opening day, don't forget the less glamorous, but equally important plan of how you will handle your accounting, plus who will provide your bookkeeping services. Accounting is the principals or practice of systematically recording, presenting and interpreting financial accounts, while Bookkeeping is the work of keeping a systematic record of business transactions. Now if you purchase an existing inn, this may be moot. However, their existing accounting program may not be the best and may need some sprucing up when you take over, so read on.

Get in the habit of tracking your expenditures early. As you prepare for your career in the innkeeping profession, you will no doubt incur some expenses, such as your attorney who helps set up your limited liability company, your attendance at a Professional Association of Innkeepers International (PAII) convention, your dues to national and local associations and the consultant who is helping you put it all together. All of these expenses are considered organizational costs and they can later be amortized over a period of seven years, potentially saving you some taxes. Open a business checking account early to make it easier to track your expenses and the amount of money you are investing in your future business. Get out of the habit of working out of your personal checkbook now and if you are running your business out of your personal checkbook cease immediately! You are in a bonifide profession, so act like it in all of your financial dealings.

Why is accounting so important? Obviously one of the most important reasons is to know how your business is doing. Is it making money or losing money. Right behind that is the need to prepare annual tax returns and those cannot be done with out adequate bookkeeping. However, it goes beyond the obvious basics. It provides you with records that your banker and/or lender will require for your financing, it will provide records for your Certified Public Accountant (CPA) to help you file tax returns and meet legal requirements, it will allow you to see where you can make changes to improve your business and its bottom line and it will allow you to prepare budgets and plan for the future based on past performance. Ultimately how you set up your accounting system and then how you use it will involve and impact every part of your business.

There are five key components to accounting for your business, Assets, Liabilities, Owners Equity, Income and Expenses. There are two main reports that you will use. The first is the Balance Sheet, which has the assets, liabilities and equity, and the Income Statement (sometimes also referred to as the Profit and Loss Statement), which contains your income and expenses. It is still possible to do your bookkeeping by hand using spreadsheets, but I would not recommend it, when there are so many computer software programs that will make your life much simpler.

The most popular small business accounting software is QuickBooks® by Intuit. But even within QuickBooks® there are choices including QuickBooks Simple®, QuickBooks Pro®, QuickBooks Pro for Mac®, QuickBooks Premier®, QuickBooks Enterprise® and QuickBooks Online®. Intuit also produces TurboTax® for income tax preparations and Quicken® for home finances. While some innkeepers use Quicken® or Quicken for Home Business®, neither really give you the depth, tools or necessary reporting to adequately run your inn. My recommendation is any of the QuickBooks Pro® versions, which actually give you more options than you will ever use. However, they will give you the opportunity to do payroll, budget, prepare financial statements, print checks, store vendor information and all the core functions you will need. There are other companies that also provide accounting software on the market. The other top five sellers are MSN Money®, Netsuite®, Peachtree Small Business®, MYOB® and Simply Accounting by Sage®. Your cost will be in the $200 range and you will need to upgrade to the next version every three years or so, because all of these companies have figured out planned obsolescence. If you are doing payroll, there is generally additional fees for that module and/or the annually updated tax tables.

You do not need to be trained in accounting to operate any of the small business accounting software. QuickBooks® is excellent in its training tutorials and providing step by step screens to help you set up your business in the software. The one thing they are not good at (or any of the software for that matter) is providing you with a good Chart of Accounts, which is the key component and backbone to the entire system. QuickBooks® does give you an option to chose accounts for "Accommodations, including B & Bs," but it is totally inadequate. I highly suggest you chose the option to set up your own accounts and use the PAII suggested Chart of Accounts outlined in their annual Industry Study of Finance and Operations (see boxes below). It does not include your balance sheet accounts, but gives you an excellent starting point and from there you can customize the Chart of Accounts to meet your needs. Every inn has different types of income and expenses they wish to track, but this is where you should start. There are other Chart of Accounts for inns out there and they are certainly acceptable, however this is the most widely used. An additional benefit is that with a Chart of Accounts similar to PAII's you will easily be able to participate in the annual Industry Study.

The Professional Association of Innkeepers International
Recommended Chart of Accounts

PAII classifies revenues and expenses in the categories defined below. A variety of other charts of accounts (systems of classifying revenues and expenses) are in use in the industry as well.

It is helpful for operators as well as bankers and other professionals serving the industry to have a common accounting system used across the inn-industry. This permits comparison of individual inns to industry averages and makes communicating about inn businesses and discussing operations simpler and more accurate.

In general, the Chart of Accounts is designed to group expenses into categories that an innkeeper might want to track and control (like housekeeping or guest supplies). The additional accounts in the Country Inn chart allow the innkeeper to evaluate the lodging operation and the restaurant separately as profit centers. In the Country Inn statement of profit and loss, restaurant revenues can be compared to restaurant expenses, lodging revenues can be compared to lodging expenses, and overhead expenses that are shared by both operations (such as maintenance or taxes) are listed together as Other Operated Expenses.


Revenue Accounts
Gross Room Rental Rent received for guest rooms and suites, including allocation for breakfast, but not including any room or sales tax
Gift Shop Sales Retail sales such as cookbooks, mugs, toiletries, calling cards, souvenirs, etc.
Food & Beverage Revenue All meals served on site (a la carte and banquet), except breakfast when it is included in the room rate; includes allocation for food on package rates such as American Plan rates or Honeymoon packages, etc.
  All sales of alcoholic beverages served on site, including a la carte and banquet beverage sales
Meeting Room Rentals Rent received for meeting rooms, banquet space, space for tented or outdoor functions or other function space rentals
Spa Services Sales of spa services performed on site, whether in a designated spa facility or en suite
Other Income Any other revenue including commissions, interest, other sales, etc.
Total Revenue Inn revenue from all sources

Expense Accounts
Inn Expenses
Lodging Salaries & Wages All pay to hourly and salaried employees for Bed & Breakfast Inns; for Country Inns, this account is divided into employees working in rooms (including the front desk or registration, housekeeping, laundry, sales and management) and those working in food & beverage (including service staff, kitchen staff, chef, and restaurant management) including bonuses
Benefits Costs of benefits such as meals, insurance, vacation and sick days that are not included as wages or salary, car, retirement plan, etc.
Payroll Taxes & Related FICA, FUTA, Medicare, Workers' Compensation, etc
Restaurant Expenses
Restaurant Salaries & Wages All pay to restaurant hourly and salaried employees
Benefits Costs of benefits to restaurant employees such as meals, insurance, vacation and sick days that are not included as wages or salary, car, retirement plan, etc.
Payroll Taxes & Related Restaurant FICA, FUTA, Medicare, Workers' Compensation, etc.
Food Cost of Sales Cost of products used in the production of food sold by the inn in the restaurant and banquets
Beverage Cost of Sales Cost of alcoholic beverages sold
Food & Beverage Other Expenses Napkins, glassware, china, silver, pans, utensils, linen, and other non-food items used in the restaurant and banquet operation
Other Operating Expenses
Auto Expenses Automobile gas, repair, maintenance, lease and related costs
Bank Fees Bank service fees, check charges, credit card merchant fees
Business Taxes & Fees Property taxes and business taxes, but excluding sales tax, bed tax and income tax
Commissions Travel agent and other referral fees
Donations Cash contributions, excluding in-kind and gift certificate donations
Dues & Subscriptions Association dues, magazines and other subscriptions to services
Equipment Rental Rental of operating equipment, not land or building leases
Cost of Guest Food & Beverage Complimentary food and beverage for complimentary breakfast, innkeeper's reception and other food related supplies for which guests are not charged
Gift Shop Cost of retail goods sold
Insurance Property, fire, theft, liability and other insurance not related to payroll
Interest Non-mortgage interest on business-related loans, credit cards, etc.
Legal &: Accounting Fees for legal and accounting services including bookkeeping and tax preparation
Marketing & Promotion Brochures, magazines, newspaper ads, printing, direct mail lists, Internet, mailing, etc.
Linens & Terry Terry and bedding including towels, linens, blankets, pillows, bathrobes, etc. (excluding restaurant linen which is categorized as a " restaurant other" expense)
Maintenance, Repairs & Fixtures Materials for maintenance & repair, minor purchases for appliances, equipment and furnishing replacements
Office Supplies Paper, tape, pens, letterhead, computer supplies, etc.
Outside Services Work contracted out such as gardening, service calls (plumber, electrician), laundry sent out, etc.
Room & Housekeeping Supplies Soap, toilet paper, light bulbs, cleaning supplies, guest amenities such as complimentary toiletries and other guest and housekeeping items
Telephone Telephone, Internet access and related expenses
Training Fees & expenses for professional workshops and conferences
Travel & Entertainment Business trips and business entertainment
Utilities Trash collection, gas, electric, water & sewer, cable TV, etc.
Miscellaneous Any other expenses
Total Expenses All inn expenses
Net Operating Income/Loss Income before mortgage, depreciation, income taxes, and owner's draw


Balance Sheet accounts include, Bank Accounts, Accounts Receivable, Land, Fixed Assets, Depreciation, Organizational Costs, Accounts Payable, Liabilities, Mortgages, Owners Equity, Owners Draws, Retained Earnings and Net Income.

Your accounting software will do your double entry bookkeeping for you and most innkeepers do their own entries for income and expenses on a regular basis. I would recommend sitting down at least once a week to make sure your deposits and expenses remain current. With current entries you can utilize the reporting software to let you know what accounts receivable you may have and what bills will be coming due. Most innkeepers do not want to hassle or do not have the knowledge to prepare depreciation entries or year-end journal entries. That is the time to visit your CPA. While you, your staff or a hired bookkeeper do most of your entries, there will be times that you will need the advice of a good CPA and at the very least for year-end entries and preparing tax returns.

One of the great features of your software is the large number of reports it can provide you. With those reports you will be able to better run your business and keep an eye on your income and expenses. I recommend that at least quarterly and preferably monthly you run a set of basic reports that includes a Balance Sheet, and Income Statement for the month, year-to-date, comparing last year's month to this year's month and last year's year-to-date to this year's year-to-date. For new innkeepers you will have to wait a year for some of those reports. You will also be able to set up a budget for your income and expense accounts and compare in monthly and quarterly reports your actual income and expenses to your budgeted amounts. This will let you know how your year is going and if you need to make any adjustments to meet your year-end targeted profit.

If all of this makes the sweat start to break out on your forehead, fear not. There are a number of consultants, accountants, CPAs and bookkeepers in our industry and in your community that will be able to help you get started or help fix a problem that has cropped up along the way. Check out those that are PAII members at http://www.paii.org/SupplierMarketplace.asp or ask one of your fellow innkeepers who they would recommend as a good local accounting professional.

While not as fun as picking out wallpaper, carpet, dishes and planning your menus, this part of your business is crucial to your success. Further you will need excellent financial records when dealing with lenders, bankers, appraisers and when down the road you decide to sell your business. Speaking of which make sure you have accounts set up that separate out personal expenses that the business might pay for. That will become important when it finally comes time to move on and you need a set of "clean and representative financial statements." So let's go get that business checking account set up!

Hugh A. Daniels, BS, MBA is a recently retired 22 year innkeeper with a degree in accounting and a head for numbers. Ask Hugh Consulting, LLC is Hugh's firm of seven years that helps small businesses, particularly in the hospitality industry with finances, purchases, sales and operations. You can find out more about Hugh's background and services at http://www.askhugh.com and may contact him at mail@askhugh.com or 435-645-3931.

Published in the PAII Getting Inn Newsletter, June, 2007

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