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

External Transactions

occur between the

organization and an

outside party.

Internal Transactions

occur within the

organization.

Analyzing and Recording 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

Analyze each transaction and

event from source documents

Analyzing and Recording Process

Record relevant transactions

and events in a journal

Post journal

information

to ledger

accountsPrepare and analyze

the trial balance

C 1

2-5

Sales

Tickets

Bank

Statements

Purchase

Orders

Checks

Source Documents

Bills from

Suppliers

Employee

Earnings

Records

C 1

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

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

AssetsTransactions

Cash & temporary investments

Accounts receivables

Allowances for bad debt

Supplies Plant, property & equipment

Accumulated depreciation

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