2.1 Definition of Terms

Understanding key accounting terms is crucial for professionals managing finances in catering and accommodation. These terms underpin the mechanics of double entry bookkeeping and ledger preparation, enabling managers to interpret financial data accurately and maintain accountability.

Books of original entry

Books of original entry are the first records in which a business writes down its transactions, in date order, before the figures are posted to the ledger. They are also called journals or books of prime entry. The main ones are the sales day book, purchases day book, returns books, cash book, petty cash book and the general journal. Example: a school catering unit that buys maize flour and cooking oil on credit first records the invoice in the purchases day book, and only later posts the amounts to the ledger accounts.

Ledger

A ledger is the principal book of account, made up of separate accounts, each showing every transaction that affects one item such as cash, a supplier, room sales or electricity. It is called the book of final entry because figures arrive there from the books of original entry. The ledger gives a summarised, account-by-account picture from which the trial balance and the financial statements are prepared. Example: a SACCO-run guest house keeps one ledger account for "Laundry Expenses" showing every laundry payment made during the month.

Nominal ledger

The nominal ledger holds the nominal accounts, that is, the accounts for expenses, losses, income and gains, such as wages, rent, utilities, food sales and room revenue. Its balances show how much the business earned and spent in a period, so it is the source of the income statement figures. Example: a farm-based restaurant records fuel for the delivery van in a "Motor Expenses" account in the nominal ledger. Some businesses use "nominal ledger" to mean the whole general ledger, so always check how a given firm uses the term.

Private ledger

The private ledger contains accounts that the owner or senior management wishes to keep confidential and so does not leave open to ordinary accounting staff. Typical accounts are capital, drawings, loans from owners, and profit and loss. Access is limited to the owner, the finance manager or the chief accountant. Example: the owner of a family-run lodge keeps the capital and drawings accounts in a private ledger so that the cashiers and the stores clerk cannot see them.

General Ledger

The general ledger is the main ledger of a business. In a divided ledger system it holds the accounts for assets, liabilities, capital, income and expenses, together with control accounts that summarise the sales (debtors) and purchases (creditors) ledgers. It is the ledger from which the trial balance is drawn. Example: a county government staff canteen keeps accounts such as Cash, Kitchen Equipment, Food Sales and Gas Expenses in its general ledger, while individual supplier accounts are kept in a separate purchases ledger.

Guest ledger

The guest ledger, also called the in-house ledger, holds the accounts (folios) of guests who are currently staying in the establishment. Charges for rooms, meals, drinks, laundry and other services are posted to each guest's folio during the stay, and payments or deposits are credited to it. When the guest checks out and settles the bill, the folio is closed. Example: at a beach resort, a guest in Room 14 is charged Ksh 8,500 for the night and Ksh 1,200 for dinner, and both amounts are posted to that guest's folio until check-out.

City ledger

The city ledger holds the accounts of customers who are not resident in the establishment but owe it money. These include companies, organisations and travel agents with credit arrangements, and guests who have checked out leaving a balance to be paid later. The accounts are monitored by the accounts department until payment is received. Example: a lodge in Naivasha hosts a three-day seminar for a company's staff, and the bill of Ksh 240,000 is transferred to the city ledger under the company's name until it is settled by cheque or transfer.

2.1.1 Explain Rules of Double Entry System

The double entry system is a fundamental accounting principle stating that every financial transaction affects at least two accounts, maintaining the accounting equation's balance. In Kenya's hospitality sector, where transactions range from purchasing supplies to receiving payments, this system ensures accuracy and prevents errors.

Debit and Credit Concepts

• Debit Entries: Represent increases in assets or expenses and decreases in liabilities, equity, or income. For example, when a hotel buys food supplies on credit, the supplies account is debited to show an increase in assets.
• Credit Entries: Indicate increases in liabilities, equity, or income and decreases in assets or expenses. Using the same example, accounts payable is credited to reflect the hotel's obligation to pay.
• Dual Effect Principle: Each transaction must have equal debit and credit amounts, preserving the balance in the accounting equation.
• Accounting Equation: Assets = Liabilities + Owner’s Equity. Every debit must be matched by a credit to maintain this equation.
• Consistency Rule: The rules for debiting and crediting must be applied uniformly across all transactions to ensure reliable records.

Application in Catering and Accommodation

In a restaurant, when cash sales occur, the cash account is debited (increase in asset), and sales revenue is credited (increase in income). This systematic approach helps managers track financial performance and cash flow accurately.

The same rules apply to larger items. Example: a school buys kitchen equipment worth Ksh 120,000 on credit. The equipment account (an asset) is debited with Ksh 120,000 and the supplier's account (a liability) is credited with Ksh 120,000, so the debit and credit totals stay equal.

2.1.2 Prepare Ledger Accounts

Ledger accounts serve as the detailed records where all transactions affecting a specific account are posted from journal entries. In catering and accommodation management, ledgers provide a clear view of individual accounts such as inventory, sales, and expenses.

Personal accounts

Personal accounts record dealings with persons or organisations, such as customers who owe the business (debtors) and suppliers the business owes (creditors). The rule is to debit the account of the receiver of value and credit the account of the giver of value. Example: when a conference centre supplies catering worth Ksh 60,000 on credit to a training institute, the institute's account is debited because it has received the service. When the institute pays, its account is credited.

Real accounts

Real accounts record assets, which are the things a business owns and which have a lasting value, such as cash, bank, buildings, furniture, kitchen equipment and inventory. The rule is to debit what comes in and credit what goes out. Example: when a bakery café buys an oven for Ksh 95,000 by cheque, the oven account is debited because the asset has come in, and the bank account is credited because money has gone out.

Nominal accounts

Nominal accounts record expenses, losses, income and gains, and they are closed at the end of the period to find the profit or loss. The rule is to debit expenses and losses and to credit income and gains. Example: when a hotel on the coast pays Ksh 45,000 for electricity, the electricity expense account is debited. When it earns Ksh 300,000 from room hire, the room revenue account is credited.

Structure of Ledger Accounts

• Account Title: The name of the account, e.g., "Food Supplies" or "Room Revenue."
• Debit Side: Left side of the ledger where increases in assets or expenses are recorded.
• Credit Side: Right side where increases in liabilities, equity, or income are recorded.
• Date Column: Records the date of each transaction for chronological tracking.
• Narration: Brief description of the transaction to provide context.
• Balance Column: Shows the running balance after each entry, helping managers monitor account status.

Steps to Prepare Ledger Accounts

1. Identify Accounts Affected: From journal entries, determine which accounts require posting.
2. Enter Date and Description: Record the date and brief details of the transaction.
3. Post Debit and Credit Amounts: Transfer debit amounts to the debit side and credit amounts to the credit side accordingly.
4. Calculate Running Balance: After each entry, update the balance to reflect the current status.
5. Cross-Reference Journal Entries: Include journal reference numbers to facilitate audit trails.
6. Review for Accuracy: Check that each amount is on the correct side of the correct account, and that the total of debit balances across all ledger accounts equals the total of credit balances.

In a hotel setting, maintaining accurate ledgers for accounts like guest deposits and utility expenses allows for timely financial analysis and budget control.

Chapter Summary

This chapter introduced essential accounting concepts, starting with the definition of key terms related to the double entry and ledger systems. It explained the fundamental rules of the double entry system, emphasizing how every financial transaction affects at least two accounts with equal debit and credit entries. The preparation of ledger accounts was covered in detail, demonstrating how individual accounts are maintained to track the financial position of different elements within an organization. The chapter also explored how transactions are recorded systematically in ledger accounts, ensuring accuracy and completeness in financial reporting. Understanding these processes is crucial for maintaining organized financial records and supporting the preparation of accurate financial statements. Mastery of the double entry and ledger systems forms the foundation for effective accounting operations in various business environments.