This is in regards to adjusting entries. If I own a hotel and In order to reserve a room you must pay $220.00 in advance, what type of adjusting entries do I make, How do I determine the amounts of the adjustments, and which accounts are affected?
To determine the adjusting entries for the advance payment of $220 for room reservations in your hotel, you would follow these steps:
Step 1: Identify the accounts involved:
The accounts affected by the adjusting entries would typically be a liability account called "Unearned Revenue" and an income account called "Room Revenue."
Step 2: Determine the timing of the adjustments:
Since the reservation fee is received in advance, it is considered a liability until the service (room) is provided. The adjusting entries will be made at the end of the accounting period to recognize the revenue that has been earned.
Step 3: Calculate the amount of revenue earned:
To determine the amount of revenue earned, you need to consider the number of nights the guests have stayed at your hotel during the accounting period. Let's assume the accounting period is a month, and 10 nights have been used by the guests.
Step 4: Calculate the unearned revenue adjustment:
Since the guests have utilized 10 nights, the revenue can be recognized for those 10 nights. If each night costs $220, you would multiply the number of nights used (10) by the room rate ($220), which would result in $2,200 of revenue earned during the accounting period.
Step 5: Make the adjusting entries:
a) Increase the revenue: Debit the "Unearned Revenue" account by $2,200. This reduces the liability.
b) Record the room revenue: Credit the "Room Revenue" account by $2,200. This increases the income.
By making these adjusting entries, you are recognizing the revenue earned from the reservation fees over the accounting period, based on the number of nights utilized by the guests.
Note: The specific account names and amounts may vary based on your accounting system and chart of accounts. It is advisable to consult with an accountant or a professional bookkeeper to ensure the accuracy of the adjusting entries in your specific situation.