October 27, 2014
Generally accepted accounting principles
Accounting is a concept to track money coming in and money going out. Accounting systems are put into place to help monitor the financial well being of the organization and monitor the financial viability of the organization. Organization needs to be profitable to stay abreast of new technology, expand both services and community demands, and replace building depreciation and purchase safety equipment as they arise. To help monitor financial information that is recorded by healthcare organizations a standard set of generally accepted principles (or GAAP) were needed to understand and set guidelines for hospitals. (Averkamp, 2012) .
In an effort to have consistent standards of practice, GAAP developed to definitions, assumptions and methods to help with accuracy and completeness of financial records. Utilizing consistent methodologies allows one to compare financial information from one company to another. A few of the most common and important GAAP include the following Cost Principle, Full disclosure, Going-concern concept, and Matching principle (Finkler et al., 2007).
Generally Accepting Accounting Principles and How They Relate to Health Care
The following are the accounting principles and how they relate to the healthcare industry. The first principle is the Cost Principle. The term “cost” signifies to the amount spent when an item was originally obtained. It does no matter whether the purchase occurred last year or twenty years ago. For this motive, the amounts shown on financial statements are denoted to as historical cost amounts. Because of this accounting principle asset amounts, are not regulated upward for inflation and are not adjusted to reflect any increase in value. This can can be deceiving, because the asset amount the organization would get if they were to see it at market value would not reflect the asset value. The financial statements will also provide a company’s current long-term assets. Sometimes you will need to go to a third party appraiser to review these financial statements. (Averkamp, 2012).
An example of this in the healthcare would be determining the current cost of a patient monitor or other non-capital equipment. There are many opinions of what the piece of equipment would be worth if you would sell it. Some would have an opinion it would be worth the original price. Others might say the value can be determined by what the replacement would be worth. Each of these viewpoints has its advantages, but they are all considered subjective measures. Accountants will record the value of assets at their original cost because it can be difficult to interpret financial statement information based off speculations.
A second GAAP is the Full Disclosure Principle. If particular information is imperative to an investor or lender that the material should be disclosed within the financial statement. This information is normally shared in footnotes and is normally attached to the financial statement.
An example of Full Disclosure Principle in healthcare would say a company is named in a lawsuit that demands a significant amount of money due to a safety event that occurred within the hospitals. When the financial statements are ready and the organization is not clear whether the hospital will be able to defend itself or whether it might lose the lawsuit, they must describe this in the notes of the financial statement. The full disclosure principle footnote is important information that needs reviewing to help decide on future investments and credit decisions. These notes to the financial statements are considered to be an integral part of the financial statements.
A third GAAP is the Going Concern Principle. This principle of accounting hypothesizes that the company will continue to exist to see to fruition its mission. There is no prediction of the