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Chapter 2
Accounting for Receivables
Case Study
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Softbed Hotel (Softbed) owns and manages a large hotel on the east coast of Canada. The
hotel is close to a few popular tourist attractions, and is usually fully booked in the summer.
Business is relatively slower in other seasons, when the company gains most of its revenues
from business clients organizing events such as trade shows and conferences.
The hotel has established a credit policy. For individual guests, Softbed requires a cash
deposit or credit card up front. For large groups of guests and corporate clients, Softbed
extends credit selectively, based on the amount of revenue they will generate for the hotel
and on their credit information obtained from a reliable independent source. For the clients
that Softbed decides to extend its credit to, the credit term is n/30.
Detailed examination of the accounts receivable aging report reveals that because Softbed
completes credit checks before extending its credit, there are only rare cases where customers
are unable to pay. However, bill dispute is the cause of most long outstanding accounts
receivable balances. The billing process is complicated because guests have multiple
purchase points (their rooms, restaurants, business centre, spa and souvenir shop). Hotel
guests can buy products and services from any of the purchase points and ask for the costs
to be billed to their rooms. Sometimes billing mistakes arise due to wrong room numbers
being recorded, or the purchase information for each customer not being compiled properly
from different purchase points. Also, customers often make last-minute changes to their room
arrangements or other arrangements from what they booked prior to their arrival. These
changes are recorded manually before being transferred to Softbed’s centralized accounts
receivable department. Sometimes these changes are improperly recorded or transferred,
resulting in incorrect invoices being billed to customers. Once customers dispute their bills,
the hotel starts an investigation to validate the customers’ claims. The investigation involves
checking internal records, and asking various hotel staff about what actually happened with
a particular customer. Unfortunately, usually by the time the investigation gets started, the
hotel staff has forgotten about what had happened, as they’re too busy focusing on the
current events at the hotel. The customers usually refuse to pay, or pay only partially, until the
disputes involving their bills are resolved, resulting in long outstanding accounts receivable.
