Introduction
The research paper discusses Generally Accepted Accounting Principles with relation to healthcare. A brief description and purpose of each principle are provided with relation to healthcare.
General discussion
The financial statements of healthcare organizations have always been comparable. As a rule, medical entities apply similar sets of accounting rules notwithstanding their legal structure. GAAP generally govern the way healthcare entities manage their financial statements. Most healthcare organizations are participants of payment programs that allow partial charges for the rendered services. Correspondingly, there are delays in time when the medical service is provided and the payment date. Furthermore, many payments are subject to retroactive adjustments, billing reviews and/or other queries occurring over a significant period of time. Such lengthy periods that occur between service provision and final settlement are featured by the ambiguities and complexities of reimbursement regulations (McLaughlin, n.d.). This complicates the estimation of the overall amount of revenue earned from such programs.
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"Generally Accepted Accounting Principles".
Accounting standards are applied to recognize such problematic estimates and revalue them each time a healthcare facility prepares financial statements. All differences in estimates are reported in the income statement during the revision period. Considering these difficulties, GAAP accounting standards require medical institutions to report service revenue as well as the receivable patient accounts, as well as the amounts received from third parties. GAAP help healthcare organizations to prepare estimates to record patient receivables and revenue in their financial statements (Jeffers et al., 2010).
As many other businesses, healthcare facilities considerably benefit from the application of Generally Accepted Accounting Principles (GAAP) considered the accounting standards applied in the United States to enable uniform recording and reporting of financial data. In such a way, medical establishments get deprived of the burden of financial statements’ comparison. GAAP increases the creditworthiness of healthcare facilities and enables them to acquire solid financial strength (McLaughlin, n.d.).
Hence, the first core benefit a healthcare establishment gets from the implementation of GAAP is financial stability. GAAP obliges healthcare organizations apply the accrual method of accounting. In such a way, medical establishments report revenue that is still outstanding. Under GAAP, medical facilities show funds or acquisitions that are guaranteed though not yet received, including government grants. In such a way, GAAP provides higher net worth compared to the cash accounting method. Such acquisitions do not include amounts received from patients that are defaulted on the establishment’s account. Such method is known as ‘contra asset’ referred to as a realizable value (McLaughlin, n.d.).
GAAP are applied to regulate financial accounting and prepare financial statements for organizations. This set of accounting rules is established by the Financial Accounting Standards Board providing a universally accepted and recognized framework to formalize accounting systems that allow organizations to keep track of their financial health. GAAP consist of rules and requirements to facilitate financial accounting. GAAP is the standard way to provide: (1) statements of operation; (2) balance sheets; (3) statements of changes; and statements of cash flow In net assets. � In such a way medical establishments are able to conveniently report on their financial health and wellbeing. �Overall, GAAP consists of the following fundamental financial principles: Entity principle; Matching principle and cash vs. accrual accounting; Going-concern principle; Cost principle; Materiality; Objective evidence; Full disclosure; and Consistency (Jeffers et al., 2010).
Entity principle
Accounting entity is essentially defined when financial statements are being prepared. Nonetheless a healthcare facility may be considered a financial entity; it may simultaneously include subsidiary financial entities, involving medical schools, hospitals, and alternative healthcare facilities. Each such subsidiary might operate independent financial operations.
The Accrual principle
The accrual principle assumes that accounting transactions are recorded when they occur rather than the period when the related cash flows occur. �Healthcare accounting assumes that the revenue earned for in-house patients is recorded pursuant to GAAP at the last day of the reporting period. � In line with the GAAP requirements, deductions out of revenue and expense should be accrued. �The accounting summaries of the revenues related to third-parties for paid claims are omitted since this accounting category is not based on accruals.�
Going-concern principle
The going-concern principle assumes that medical centers should prepare their financial statements with the view of the indefinite continuation of their professional operations. The principle of conservatism assumes that any purchases should be documented by certified public accountants to provide justified estimation of such transactions. Outstanding accounts receivable and the overall period of medical equipment productivity are the criteria of such estimation (Jeffers et al., 2010).
In addition to financial stability GAAP principles and their practical implementation warrant credit worthiness, proper management of assets and liabilities through the GAAP financial reporting, and bargaining power. Owing to these and other advantages, the US medical centers widely apply GAAP as the uniform set of accounting methods used to manage financial statements. GAAP provides accountants with accurate data on the detailed balance, fiscal returns, and outstanding debt of medical centers. It is therefore generally accepted that medical centers uphold GAAP guidelines when they provide accounts for their economic figures in the form of financial declarations (Jeffers et al., 2010).
- Jeffers, A., Mengyu, W., Askew, S. (2010). “The Switch from US GAAP to IFRS”, Proceedings of the Northeast Business & Economics Association: 48-54.
- McLaughlin, M. GAAP Reserving Practices for A&H Business, Financial Reporting Section Monograph, p. 154-168.
