Accounting Practices Depending on the Type and Essay

Accounting Practices

Depending on the type and size of a particular health care facility, the generally accepted accounting principles (GAAP) used to conduct medical accounting can vary greatly, and these differences may have significant impact on the eventual delivery of medical services. According to the Financial Accounting Standards Board's (FASB) Accounting Standards Codification, which is "the source of authoritative generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities," a conflict of interest routinely occurs when "some health care entities recognize patient service revenue at the time the services are rendered regardless of whether the entity expects to collect that amount" (FASB, 2011). Individual doctors working within the confines of a small family practice, who have not fully incorporated, typically rely on cash-basis accounting, which is the "major accounting method that recognizes revenues and expenses at the time physical cash is actually received or paid out" (Investopedia, 2011). Using this accounting technique is simpler for small medical practices that operate on a local level, and allows the doctor in ownership to avoid the costs of hiring a professional bookkeeper. Cash-basis accounting also leads to a greater degree of financial manipulation, in the form of "under-the-table" payments and the misreporting of medicinal administration.

Large hospitals and medical care conglomerates opt for the second major accounting method, accrual accounting, "a form of accounting whereby revenues are recognized when they are earned, not when they are received" in which "cash does not need to change hands before the revenue is recognized" (Forbes Financial Glossary, 2010).This more flexible form of accounting enables major medical corporations, and other large entities such as university hospitals, to align their expenses with revenues while maintaining sufficient capital reserves. A recent set of amendments passed by the FASB aims to rectify this potential conflict of interest, by requiring "health care entities that recognize significant amounts of patient service revenue at the time the services are rendered even though they do not assess the patient's ability to pay to present the provision for bad debts related to patient service revenue as a deduction from patient service revenue (net of contractual allowances and discounts) on their statement of operations" (2011). The choice between cash-basis accounting and accrual accounting can result in very serious ramifications for medical centers, hospitals, and individual practices, and each method can produce entirely different income statements for the same set of financial circumstances.

Small family practices, which deliver comprehensive medical care within small to medium sized communities, have already deduced that cash-basis accounting allows them the opportunity to manage their tax….....