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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Chapter 3: Principles and Practices of Health Care Accounting
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