Travel Business

Travel Agency Accounting

Today, accounting is recognized as an information system and is designed to communicate the right information to the internal as well as external users. Accounting involves recording, classification and summarizing the accounting information directed toward the determination of financial strength and weakness of a travel agency.

To manage a travel agency/tour operator profitably demands accurate recording and preparation of financial statements. These are essential in determining the true and fair status of the business and for making strategic plan and decisions.

Accounting System

The basic objective of accounting is to ascertain the profitability and finance position of a travel agency operation. To achieve this, every travel agency prepares the following journals and statements:

  • Sales Journal
  • Cash Receipt
  • Account Receivable
  • Cash Disbursement
  • IATA ledger
  • Pay Roll
  • General Ledger
  • Profit and Loss Account
  • Balance Sheet

Sale Journal

In this journal, all credit sales are recorded. Sometimes, a travel agency provides extends credit facilities to its clients i.e., leisure and commercial clients. It, in fact, makes a cash loan to its clients. However, it has been noticed that only large-scale travel agencies can afford to extend credit to corporate customers, but even then, a thorough credit check is required before a credit amount is opened.

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To maintain the up-to-date record of all credit sale, travel company prepare a sales journal.

Cash Receipt Journal

It is used to record all revenues received by the travel agency during the period. In other words, transactions concerning cash, credit cards, cheques are recorded in this journal. For example sale of the tour package, the commission received from the hotel, airlines and other vendors are recorded in it.

Account Receivable

When a travel agency purchases tourism products, services from the supplier on credit, the amount owed to producers/suppliers/sellers are referred to as an account receivable.

Cash Disbursement

Cash outflows are recorded in cash disbursement journal. Cash outflow means the operating expenses of the travel agency like rent, salaries, telephone expenses, administrative expense, financial and legal expenses, selling and distribution expenses etc.

These are mostly paid by cheques or through bank drafts. Cash disbursement journal is also called Cost Journal. Thus, cost journal is used to record the payments made by a travel company to its employees and others.

IATA Ledger

The IATA ledger is known as ‘Chief Book of Accounts’ and is the destination point of entries made in the journals or sub-journals. It is used to balance the accounts of the travel agency. In accounting, ‘Balance Account’ means continuous and consistent check and verification of the accuracy of a travel agency’s accounting system.

The main objectives of IATA ledger are:

  • Identification of travel agencies revenue sources.
  • Determination of total sales (cash and credit).
  • Determination of total commission earned by the travel agency.
  • Find out the total amount owned to IATA.
  • Evaluate the performance of each travel agency ( which is recognized by IATA).

The procedure of posting IATA Ledger is very simple and easy to understand. Today, almost every travel agency is using Electronic Data Processing System (EDP) to maintain an up-to-date record of each cash as well as credit card transactions.

The procedure of posting Cash and Credit Card Transaction in the IATA Ledger is:

  1. Enter the date, items, and invoice number.
  2. Enter the gross amount of cash and credit-card transaction.
  3. Calculate the commission and enter in the agency commission column.
  4. Subtract the commission form the gross sale and enter the result in the Net Amount column.
  5. If any amount is due then record it in the due column.

Pay Roll Journal

In this journal, a travel agency maintains the record of salaries and other benefits (financial) given to its employs like the number of employees on the payroll, total salaries, insurance premiums, compensations, housing facilities, medical facilities and other benefits to the employees.

Practically, the total from each journal is compiled monthly and posted to the general ledger. In this ledger, all types of the account are maintained/transferred from the various individual journals to provide ready information for the preparation of the financial statements.

ASTA Accounting System

In 1979, Touche Ross and Co., developed the ASTA Travel Agency Accounting System to facilitate travel agent and tour operators specifically for ARC and IATA reporting. All items in the balance sheet and income statement are numbered from 100 to 699.  Each three-digit number convert the information for the users.

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Basically, an accounting system is designed to record the agency’s assets, liabilities, capital, revenues/income/gains, and expenses or losses etc. A brief discussion of these follows:

Assets

Assets are economic resources which are owned and used by the travel agency and are expected to benefits in future operations. Hence, assets can be expected eventually to increase the cash inflow of the travel agency. Assets are two types:

  1. Current assets
  2. Fixed assets

Liabilities

These are the claims against travel agency assets. Practically, liabilities are future sacrifices of economic benefits arising agency’s debts to transfers assets or provide services to other as a result of past business transactions. These are of two kinds

  1. Current or short period liabilities
  2. Long-term liabilities

Capital

Capitals represent the amount of paid or contributed by owners, shareholders to the agency. More precisely

Capital = Assets – Liabilities

It is equal to the difference between the values of what is owned by the agency and the value of what is owed by the travel agency. Capital represents the net worth of the agency to owners.

Income/Gains

It is the monetary value of goods and services sold by the travel agency such as the sale of the tour, airlines commission and interest received etc. Revenues are cash inflows of the agency for the services rendered to the clients during a specific period.

Expenses

Expenses represent the cost of doing travel agency business. Basically, these are cash outflows and are paid by the agency to obtain or purchases goods and services from the providers. Other expenses are included in it like as salary, administrative expenses, financial and legal expenses etc.

Financial Statements

Financial statements are the formal output of any accounting system and are prepared to provide accurate, timely understandable, objective and comparable accounting information to the users. Today, these statements are considered as a base for making rational decisions concerning the future of the travel agency.

Types of Financial Statements

Financial statements are mainly categorized into two types. These are as follows:

  1. Income Statement
  2. Position Statement

Income Statement

It is also known as profit and loss account and is prepared to provide information on an agency’s profitability over a given time period. It is the statement of the revenues earned and other gains made during a year; matched with the amounts spend to earn these revenues.

It shows whether the travel agency earned a profit i.e. the excess of income over expenditure or has suffered a loss i.e. the excess of expenditure over income.

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An income statement contains a summary of figures relating to the cost of tours sold; various operating and non-operating expenses and provisions for expenses. These are then compared with sales and various operating and non-operating revenues.

The income statement provides important data for the financial planning, profit planning and debt-paying ability of the travel agency. Essentially, this statement provides vital financial information to the internal as well as external users.

Position Statement

It represents the financial health of a travel agency at a given time and therefore, it is often called a ‘statement of financial position‘. A position statement may be defined as statements prepared with a view to measuring the true financial position of a travel agency on a certain fixed date. It is prepared by the transferring all balance that belongs either to personnel or to real accounts.

These balance either represents assets or liabilities existing at the last date of the accounting period. In the technical world, it provides details about the resources of a travel agency and how these resources financed, either by lending funds or by investing capital in the business.

Users of Financial Statements

Financial statements are the mirrors which reflect the financial position and operating strength or weakness of a travel agency. These statements are useful to owners, creditors, suppliers, management, government, and other outside parties. Users of the financial statements are as follows:

1# Owner

The owner is mainly concerned with the managing the investment and long-run success of the travel agency. They are also interacted to know whether their money is used for those purposes for which they have invested it. The income and position statements tend to be the primary source of information to the owner.

2# Creditors

They represent persons, banking and financial institutions which have loaned funds to the travel agency. They are interested in knowing entity’s debt-paying ability for a short or a long term.

3# Suppliers

Suppliers in the travel business are not similar to the creditors. They are the producers/principals such as airlines, hotels, tour operators, transport operators, cruise liners for whom the travel agency collects revenues or collects product lines to formulate tourism product or tour package.

These suppliers are interested in knowing the agency’s debt-paying ability. Even some suppliers demand bank verification and audited financial statements etc.

4# Management

Management uses accounting information as an input to make rational decisions and to achieve profitability objective. Apart from financial statements, management needs some other reports too like the – booking commission report, employees and suppliers reports.

Ironically, management is interested only in knowing the existing profits, EPS, chances of survivals, a possibility of growth and diversification, relative performance, so that it can chalk out suitable strategies for its travel agency/operator.

5# Employees

Basically, employees are concerned with job satisfaction, job security, promotion, welfare schemes and other financial incentives given by the travel agency. So they want information on the profitability and the future prospects of a travel agency.

6# Financial Advisors

These advisors make their living by advising clients how and where they should invest their shaving. However, before they offer any advice they need financial information about the company which they may recommend to invest money.

7# Government

The financial statements are used to assess the liability of a travel agency and are also used to determine the overall performance of the travel industry. These statements provide valuable information to an authority for the determination of tax liability.

Government act as a base for farming and amending the regulatory structure of travel agency business.

Financial Analysis and Control Techniques Used in Travel Agency Business

It is observed that financial statements convey much useful financial information to internal management and outside users, and for this reason, it has become imperative to discuss the various tool for analyzing financial statements and control techniques used in travel agency business.

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The emphasis is focused on the application of tools and techniques which are key indicators of a travel agency’s financial health and are considered vital for wise decisions to improve an agency’s profitability, financial soundness, and strong financial strategies.

Accounting Ratios

Accounting ratios are known as ‘financial ratios‘ and are considered key indicators for measuring the agency’s profitability and financial performance. They may be calculated at one point of time or may cover several time period to identify trends in several years. It is also used to compare one’s own position with an average industry.

According to Wixon and Kelly in 1970, “an accounting ratio is an expression of the quantitative relationship between two numbers. It is a simple arithmetical expression of the relationship of one amount to another like 100 to 200 or 600 to 700 etc.”

The main ratios which are widely used to analyze an agency’s performance are:

Liquidity Ratio

  • Current Ratio
  • Quick Ratio

Profitability Ratio

  • Profit Margin
  • Return in Assets
  • Return on Investment

Activity Ration

  • Fixed Assets
  • Accounts Receivable
  • Account Payable

Leverage Ratio

  • Capital-gearing Ratio
  • Financial Leverage
  • Operating Leverage
  • Debt Equity Ratio

Liquidity Ratio

It means an agency must be able to pay its short period debts and obligations from its short period financial resources to remain in the business. The most common used liquidity ratio is the current ratio.

Current Ratio

This ratio compares the agency’s current assets to current liabilities. A high current ratio indicates that the travel agency is liquid and has the ability to pay its current obligations in time as and when they are due.

Activity Ration

Activity ratios measures how effectively a travel agency manages its resources. Practically, funds are invested in various assets of a business to enhance sales and earn profits. The greater the return which can be derived from the assets, the more attractive the investment and the more profitable the agency.

These ratios are also called ‘turnover rations‘ because they reveal how rapidly resources are converted into revenues. High ratios are generally associated with good asset management. The activity ratios are:

  1. Account Receivable
  2. Account Payable
  3. Fixed Assets

Account Receivable indicates the number of times the average receivables are turned over during a year. The higher the value of turnover, the more efficient is the management of account receivable and vice versa.

Account Payables indicates how much time a travel agency is likely to take in repaying its account payables/creditors in a very short period. The less the number of times, the more is the credit period that a travel agency enjoys.

Profitability Ratio

The main objective of travel agency business is profit maximization. Essentially the existence, continuance, and expansion of travel business depend, to a large extent, on the travel agency’s capacity to earn good amount of profit every year.

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Profitability ratios are a fair indication of sound management of a travel agency. The main profitability ratios are profit martin/net profit to sales ratio, return on assets and return on investment.

Capital Structure Ratio

It measures the relationship between long-term debts and owner’s equity. Generally, debt financing increases the risk of investment in the business. So a higher leverage ratio is associated with higher risk and vice versa. However, there are times when a travel agency can make use of borrowed capital than equity.

The debt-equity ratio and debt servicing ration are used to measures the capital structure of an agency. The debt-equity ratio compares the total debt with total owner’s equity of an agency.

Cash Flow Analysis

Cash flow analysis is a measurement of the amount of money that a travel agency has in navel at any point in time. It enumerates the net effect of the various transactions on cash and takes into account the receipts and disbursements of cash. It also summarizes and causes of changes in the cash position of a travel agency between the different dates of balance sheets.

The long-term survival of any travel agency depends on its ability to generate cash from its main trading activities.  The cash flow analysis is prepared by using the information contained in a travel agency last two year’s annual reports.

Practically, cash flow analysis is based on the profitability and liquidity of the travel agency and it helps the users to assess and identify:

  • Travel agencies’ ability to generate future net cash inflow from the operations.
  • An agency’s need for external financing.
  • The reason for the difference between net income and net cash flow from the operational activities of the agency.
  • The effects of cash and non-cash investing and financing transactions.

Moreover, by analyzing cash flow, the owners, shareholders and the management know exactly where the travel agency stands at any given time, on the other hand, credits, or suppliers, and the financial institutions use cash flow analysis to determine whether the travel agency can repay loans or has the debt paying capacity.

Break Even Point

A travel agency is said to be ‘break’ even when its total revenues are equal to total costs. It is a point where there is no profit or loss and at this point, the contribution is equal to fixed costs.

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Budgetary Control

The keystone of planning and control activities in the travel agency is the budgetary control system, which is a major part of the day-to-day operations of the accounting system. It is applied to a system/technique of a management and accounting control by which all travel agency operations and activities are forecasted and actual results, are compared with budget estimates.

The process of budgetary control involves the establishment of budgets, relating the responsibilities of executives to the requirements of a policy, and the continuous comparison of actual result with budgeted results, either to secure by individual action the objectives of that policy or to provide a basis for its revision.

Practically, budgetary control technique is a useful accounting tool for translating strategic objectives/goals into realities. It also provides the management useful parameters for measuring the travel agency’s performance so that agency management can be tape corrective and timely actions if actual results are below the planned ones.

Advantages

Some advantages of the budgetary control system are following as:

  • It helps the management of an agency to conduct its business in a more efficient and effective manner.
  • It lays emphasis on staff organization.
  • It is helpful in measuring the efficiency of the whole organization and each department individually.
  • It promotes the feeling of cost consciousness.
  • It forces the manager to concentrate on the future.
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