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Hello,
I am preparing for my P7 exam and i would like to know the double entry for the following (it has been taken from the December 2017 exam paper).
‘When customers book to stay in the hotel, they are charged a deposit equivalent to 20% of the total cost of their stay, and a further 20% is payable eight weeks before arrival. The remaining 60% is settled on departure. If a booking is cancelled prior to a week before a guest’s stay commences, then a full refund is given, but no refunds are given for cancellations within the week leading up to a guest’s stay’
I would like to know the double entry of both, the 40% and 60%.
I appreciate your help!
Let’s say a customer makes a booking for 5 nights at $100 a night. On booking the customer pays $100 and 8 weeks before arrival another $100. In each case the double entry is:
Dr Cash 100
Cr A current liability a/c 100 (doesn’t matter what it’s called – could be called “deposits” for example).
If at any time at least one week before arrival the booking is cancelled, the D/E will reverse this (so Dr liability/Cr cash with the refund).
Revenue will be recognised when the performance obligations (providing the room, etc for the period of stay) is fulfilled. This could be accounted for at the end of the stay as follows:
Dr Cash 300/Cr Revenue with the 60% and Dr Liability/Cr Revenue with the 200 deposit.
If the booking is cancelled within a week before the stay, the double entry Dr Liability/Cr Revenue can be made immediately because there is no performance obligation to settle.
The only issue is dealing with cut-off at the year end. If, for example, the double entry was Dr Cash/Cr Revenue for all receipts, there would simply need to be a period-end adjustment (Dr Revenue/Cr A current liability a/c) for deposits on bookings in the next accounting period.Thank you Kim for your reply!
Just one question!
Does the hotel recognize revenue once they provide the room to the customer or when the customer leaves the hotel? I’ve understood what happens with the one week before arrival example, but once you go to the hotel and you pay the remaining amount to the receptionist (even if you are at the start of your holidays), will the accountant recognize that remaining amount as a liability until you leave?
Any payment in advance of providing goods/services would have to be recognised as a liability until the performance obligations have been met.
Bear in mind, a business can account for transactions day-to-day in any practical way that is suited to the accounting system. It would not be practical to have to consider for every receipt “is the credit to revenue or liability”? So there is no reason why, during the year, all receipts could not be booked as revenue – and, as I previously mentioned, it would then be a matter, at the year end, to calculate the advance payments on all next year’s bookings and make a single period end adjustment.
It would only matter whether the customer paid the balance on arrival or departure if the stay straddled the reporting date – for which the auditor would need to verify a materially correct cut-off.
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