October 27, 2014
Generally Accepted Accounting Principles
Healthcare Organizations employ accountants that monitor the financial aspects of that organization. These internal accountants’ keep track of the organizations financial records throughout the course of the year (Finkler, Kovner and Jones 2007). Once a year the Healthcare organization hires a Certified Public Accountant (CPA) to examine the financial records of the company. The CPA uses a set of rules known as Generally Accepted Accounting Principles (GAAP), these principles were established by the Financial accounting Standards Board (FASB). The FASB developed these standards to ensure that financial information was recorded in a concise, credible and understandable way (FASB 2014). Within the GAAP there are certain principles that the CPA uses to review and audit a healthcare organizations financial records. This paper will look at the principles uses in the GAAP and how they relate to healthcare.
The first principle that a CPA looks at in an audit is Entity Concept. The entity concept is defined as the “person or organization that is the focus of attention” (Finkler, Kovner, and Jones 2007). The financial records must reflect the entity in which is being recorded. This relates to healthcare in many ways. If a hospital and a long term care facility are owned by a parent company, each of these facilities would have their own financial statements. The parent company would also have financial statements with both of these entities in them. When looking at financial statements it is important to be able to determine the entity that is being reviewed.
The next principle that is looked at is called the Going Concern. The going concern is an assumption made by the CPA that the healthcare organization is going to be able to carry out its objectives and commitments (Accounting Coach 2014). The healthcare organization is not going to liquidity its asset and will remain in business (Finkler, Kovner, and Jones 2007). This is important because some assets held by the organization are valuable only if the organization is to continue in business.
There are two ways to record revenues and expenses that organizations can use for recording money. The first way is called the cash basis, which is when cash is received it is recorded, and when cash is spent it is recorded. In using this method of recording the organization doesn’t truly reflect the costs of caring for patients, and the expenses of the organization (Finkler, Kovner, and Jones 2007). Another method is the Accrual Accounting method. In using this method the organization records expenses in the same year that revenues that are generated (Finkler, Kovner, and Jones 2007). This allows the organization to show a full picture of the year’s activities to the accountants. By using the Accrual Accounting method in healthcare, organizations can have ownership of revenue owed to them for that year. This is a more complicated method of accounting but, shows a truer picture of the financial picture of the organization.
The Cost Principle is the cost in which the organization pays for an asset. These are then recorded in the financial statements as assets to the company (Finkler, Kovner and Jones 2007). When a healthcare organization purchases a piece of equipment for the organization, the amount that was paid for the equipment is recorded, and not the value. Over time the amount on the financial statements for that piece of equipment will appear less then what it was purchased at. This part of the cost principle is called the depreciation value. In reviewing financial statements of an organization the CPA may find it difficult to interrupt the statements due to changes in the value of equipment or land. While the value of equipment may rise, the amount that the item was originally purchased for remains in the financial statements.
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