Question

Discuss why GAAP principles are important in financial accounting. Give examples of various transactions found in most hotels and which GAAP principles would apply. (400 words required)

Answer 1

GAAP: Generally Accepted Accounting Principles.

Importance of GAAP in financial Accounting

· GAAP was introduced to make uniform set of rules and standards to ensure consistency.

· Financial statements prepared based on GAAP is easy to understand by the stakeholders.

· GAAP mandates Accrual system of Accounting, which help organization from long term perspective.

· GAAP ensures accuracy and removes the changes of material misstatement in financial statement.

Examples of various transactions found in most hotels and which GAAP principles would apply.

(1) hotel generates revenue or income by providing services or renting rooms.

Example of revenue items include Hotel room reservation fees and room charges

GAAP : To record the revenue as an when realized and not when cash is received

(2) An expense is a cost or loss that a hotel incurs in providing services or renting rooms. Expenses may relate to salaries, cost of food and beverage and utilities.

GAAP: To record the Expense as when incurred. Interest cost on a hotel loan must be capitalized under US GAAP.

(3) Under US GAAP fixed assets must be reported using historical cost.

(4) In valuing inventory under IFRS, LIFO is prohibited, but permitted under US GAAP

(5) A hotel holding company is required to consolidate entities based on majority voting rights in US GAAP

(6) Accounting regulations and procedures, such as U.S. GAAP, require a hospitality company to report "fair" and complete financial statements at the end of each quarter or year

(7) In hotel accounting terminology, "fair" means accurate or objective. A complete set of financial reports includes a balance sheet, statement of profit and loss (Also known as Statement of income), statement of cash flows and statement of equity.

(8) Hotel manager is required to implement guidelines for asset and liability recording systems because asset and liability items indicate the company's financial solidness. These items reflect a firm's working capital or short-term cash availability.

(9) A liability is a debt the hotel must repay when it is due or a financial promise it must honor on time.

(10) A short-term liability is a debt that a hospitality firm must repay in a year or less, whereas a long-term debt is due after a year. A hotel bookkeeper debits an asset account to increase its amount and she credits it to reduce the account balance. The opposite is true for a liability account. A hotel reports assets and liabilities in its balance sheet.