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Chapter 3: Principles and Practices of Health Care Accounting

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This document discusses accounting principles for health care organizations. It explains that transactions are recorded in journals and ledgers and used to produce financial statements. External transactions occur between the organization and outside parties, while internal transactions occur within the organization. The document also describes the difference between cash basis and accrual basis accounting and outlines the steps to analyze, record, and report transactions according to accrual accounting principles.

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Principles and Practices of Health Care Accounting Chapter 3
Learning Objectives • Record financial transactions • Understand the basics of accrual accounting • Summarize transactions info financial statements
Analyzing and Recording External Transactions occur between the organization and an outside party. Internal Transactions occur within the organization. Process Exchanges of economic consideration between two parties. C 1 2-3
The “Book” • As transactions occur, they are recorded chronologically in a journal • Periodically the transactions are summarized by account into a ledger • The journal and ledger make up the chronological listing of transactions and the current balance in each account • Totals for each account in the ledger are used to prepare the four financial statements
Analyzing and Recording Process Analyze each transaction and event from source documents Record relevant transactions and events in a journal Post journal information to ledger Prepare and analyze accounts the trial balance C 1 2-5
Purchase Orders Bank Statements Source Documents Sales Tickets Checks Bills from Suppliers C 1 Employee Earnings Records 2-6
Methods of Accounting • Cash basis of accounting- tracks cash when received and when cash is expended regardless of when services were provided or resources were used • Accrual basis of accounting- records revenues when earned and resources used regardless of the flow of cash in or out of the entity • Health care organizations use accrual accounting
Recording Transactions 2 rules under accrual accounting • At least two accounts must be used to record a transaction a) Increase(decrease) an asset account whenever assets are acquired (used) b) Increase (decrease) a liability account whenever obligations are incurred (paid for) c) Increase a revenues, gains, or other support account when it occurs d) Increase an expense account when an asset is used
2nd Rule Recording Transactions • After each transaction, the fundamental accounting equation must be in balance: Assets=Liabilities +Net Assets
Chapter 3: Principles and Practices of Health Care Accounting
Chapter 3: Principles and Practices of Health Care Accounting
Developing the Financial Statements • Once the transactions have been analyzed and recorded, the organization can develop the four financial statements: • Balance Sheet • Statement of Operations • Statement of Changes in Net Assets • Statement of Cash Flows
Question11 (from textbook) • List and record each transaction for the Claymont Outpatient Clinic, under the accrual basis of accounting, at Dec 31 20X1. Then develop a balance sheet, statement of operations for the year ended Dec 31 20X1. 1. 1. the clinic received a $10,000,000 unrestricted cash contribution from the community. 2. The clinic purchased $4,500,000 of equipment. The clinic paid cash for the equipment. 3. The clinic borrowed $2,000,000 from the bank on a long term basis. 4. The clinic purchased $550,000 of supplies on a long term basis. 5. The clinic provided $8,400,000 of services on credit 6. In the provision of these services, the clinic used $420,000 of supplies 7. The clinic received $800,000 in advance to care for capitated patients.
8. the clinic incurred $4,500,000 in labor expenses and paid cash for them 9.The clinic incurred $2,230,000 in general expenses and paid cash for them 10. The clinic received $6,000,000 from patients and their third parties in payments of outstanding accounts 11. The clinic met $440,000 of its obligations to capitated patients (transaction 7) 12. The clinic made a $400,000 cash payment on the long term loan 13. The clinic also made a cash interest payment of $40,000 14. A donor made a temporarily restricted donation of $370,000, which is set aside in temporary investments 15. The clinic recognized $400,000 in depreciation for the year. 16. The clinic estimated that $850,000 of patient accounts would not be received and established a provision for bad debt.
Solution: General ledger for Claymont Outpatient Clinic Assets Transacti ons Cash & temporar y investme nts Accounts receivabl es Allowanc es for bad debt Supplies Plant, property & equipme nt Accumula ted depreciat ion Beginning balance
Summary • One of the major roles of accounting is to record the transactions in a standardized format and report the results. • These transactions are the basis for the financial statements • Accrual accounting is used by health care organizations • Financial statements are a foundation for decision making in health care organizations

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Chapter 3: Principles and Practices of Health Care Accounting

  • 1. Principles and Practices of Health Care Accounting Chapter 3
  • 2. Learning Objectives • Record financial transactions • Understand the basics of accrual accounting • Summarize transactions info financial statements
  • 3. Analyzing and Recording External Transactions occur between the organization and an outside party. Internal Transactions occur within the organization. Process Exchanges of economic consideration between two parties. C 1 2-3
  • 4. The “Book” • As transactions occur, they are recorded chronologically in a journal • Periodically the transactions are summarized by account into a ledger • The journal and ledger make up the chronological listing of transactions and the current balance in each account • Totals for each account in the ledger are used to prepare the four financial statements
  • 5. Analyzing and Recording Process Analyze each transaction and event from source documents Record relevant transactions and events in a journal Post journal information to ledger Prepare and analyze accounts the trial balance C 1 2-5
  • 6. Purchase Orders Bank Statements Source Documents Sales Tickets Checks Bills from Suppliers C 1 Employee Earnings Records 2-6
  • 7. Methods of Accounting • Cash basis of accounting- tracks cash when received and when cash is expended regardless of when services were provided or resources were used • Accrual basis of accounting- records revenues when earned and resources used regardless of the flow of cash in or out of the entity • Health care organizations use accrual accounting
  • 8. Recording Transactions 2 rules under accrual accounting • At least two accounts must be used to record a transaction a) Increase(decrease) an asset account whenever assets are acquired (used) b) Increase (decrease) a liability account whenever obligations are incurred (paid for) c) Increase a revenues, gains, or other support account when it occurs d) Increase an expense account when an asset is used
  • 9. 2nd Rule Recording Transactions • After each transaction, the fundamental accounting equation must be in balance: Assets=Liabilities +Net Assets
  • 12. Developing the Financial Statements • Once the transactions have been analyzed and recorded, the organization can develop the four financial statements: • Balance Sheet • Statement of Operations • Statement of Changes in Net Assets • Statement of Cash Flows
  • 13. Question11 (from textbook) • List and record each transaction for the Claymont Outpatient Clinic, under the accrual basis of accounting, at Dec 31 20X1. Then develop a balance sheet, statement of operations for the year ended Dec 31 20X1. 1. 1. the clinic received a $10,000,000 unrestricted cash contribution from the community. 2. The clinic purchased $4,500,000 of equipment. The clinic paid cash for the equipment. 3. The clinic borrowed $2,000,000 from the bank on a long term basis. 4. The clinic purchased $550,000 of supplies on a long term basis. 5. The clinic provided $8,400,000 of services on credit 6. In the provision of these services, the clinic used $420,000 of supplies 7. The clinic received $800,000 in advance to care for capitated patients.
  • 14. 8. the clinic incurred $4,500,000 in labor expenses and paid cash for them 9.The clinic incurred $2,230,000 in general expenses and paid cash for them 10. The clinic received $6,000,000 from patients and their third parties in payments of outstanding accounts 11. The clinic met $440,000 of its obligations to capitated patients (transaction 7) 12. The clinic made a $400,000 cash payment on the long term loan 13. The clinic also made a cash interest payment of $40,000 14. A donor made a temporarily restricted donation of $370,000, which is set aside in temporary investments 15. The clinic recognized $400,000 in depreciation for the year. 16. The clinic estimated that $850,000 of patient accounts would not be received and established a provision for bad debt.
  • 15. Solution: General ledger for Claymont Outpatient Clinic Assets Transacti ons Cash & temporar y investme nts Accounts receivabl es Allowanc es for bad debt Supplies Plant, property & equipme nt Accumula ted depreciat ion Beginning balance
  • 16. Summary • One of the major roles of accounting is to record the transactions in a standardized format and report the results. • These transactions are the basis for the financial statements • Accrual accounting is used by health care organizations • Financial statements are a foundation for decision making in health care organizations