Generally Accepted Accounting Principles refers to a set of principles set out for the presentation of financial statements of business organizations and other organizations as well. As such there are those principles that ought to be followed when presenting financial statements for heath care organizations. In this paper, I am going to these principles that are used in presenting financial statements for health care organizations, their intentions, and how they relate to the health care environment.
This principle requires that any accounting or preparation of financial reports and statements must be done for a certain entity (Cleverly, 2005, p.4). The entity must be specified. In specifying the entity which is being accounted for, we reveal pertinent and mandatory information. For health care institutions the entity becomes the hospital of health clinic itself. The owners of the health care center do not matter. Whether it’s owned by the government or a private individual is not an issue of concern. We are only concerned by the financial transactions that the hospital makes as a business entity. This principle makes sure that health care centers do not receive any special attention based on the fact that most of these institutions are government-owned and are nonprofit. It also aims at giving a clear-cut separation between the accounting entity and the legal entity. In most cases, the legal entity happens to be the owners.
In general terms accounting is intended to measure the resources, how they change over some time, and their obligations over the specified period (Cleverly, 2005, p.4). This principle requires that all the information provide3d in the financial reports and statements be in monetary terms. The information must be quantifiable in terms of money. It does matter whether the health care center received drugs from donors in cartons or not, but this information must be disclosed in monetary terms. To the health care institutions, this principle has a deep meaning; it means that, upon preparation of the institution’s balance sheet, it must balance the assets to the value of claims (Cleverly, 2005, p.4).
Principle of going concerned
This principle requires that in preparing financial statements. An assumption is made the organization will remain in business for an indefinite large period. The key concept here is that we should not account for a business as though it will be dissolved in the next couple of days, even though this is the case. We should always assume that the firm will remain in business even in years to come (Ward & Finkler, 2006, p.17). If however, it appears that the business is way of collapsing and that it may not be a going concern, this information should be revealed in the books of account.
This principle requires the organization to consider its risks when preparing financial statements. The principle requires organizations to account for or anticipate losses that may be incurred, but not to do the same for possible gains that the firm may incur. The principle often results in underestimation of the organization’s value (Ward, & Finkler, 2006, p.17). In health care centers, sometimes they may anticipate money from, say. The patients are admitted to the hospital wards since they have a certain surety of being paid. This principle prohibits this kind of accounting. This is to ascertain prudence when compiling financial reports (Cleverly, 2005, p.4)
The matching principle
This principle requires that all revenues that a firm earns should always be matched with the expenses incurred in realizing the revenues. In other words, we should never match one period’s revenue with the expenses of the previous or subsequent period (Ward, & Finkler, 2006, p.17). This principle aims at ensuring that revenues of one particular period are accounted for about the expenses for that particular period only. This principle implies that, if a firm pays rent expenses in advance for a subsequent year, then the amount of money that is more than being paid in advance should not be used to account for revenues of that particular period. In a health care center environment, it is possible that a hospital pays for the cost of medicine before actual delivery or pays for the delivery cost of materials before the service is received. Then, in this case, the amount of money over being a prepayment is not accounted for as an expense in the current accounting period. The amount of money accounted for is the total sum that ought to have been incurred if there was no prepayment or overpayment. Likewise, revenue that ought to have been incurred during a subsequent period but is received during the current period, should not be accounted for.
Principle of objective evidence
The principle requires the preparation of financial statements to be subject to observable evidence of the relevant documents (Khumawala, & Granof, 2010, p.509). A health care may sometimes receive tokens from well-wishers which may not necessarily be documented. In such a case, then they should not be accounted for if the evidence available is not in such a way that reasonable individuals can agree with them within relatively narrow bounds (Ward, & Finkler, 2006, p.18).
In accounting terms, an item is considered to be material if it can change the decision of a user in making accounting decisions (Khumawala, & Granof, 2010, p.509). The principle requires the preparing accountant to amend errors that are of significance to the organization. A firm may make an error in its records such that instead of witting 500000, the recording officers record 50. In this case, the error is significant, and the accountant should correct the error.
Principle of consistency
This principle governs the preparation of records from one period to the other. It ensures the existence of consistency from a firm in the accounting methods it adapts. A firm is not allowed to change from one method to another without providing a good reason for the same. The principle aims at avoiding arriving at a figure that does not represent the accrual growth of the firm as a result of using different methods of accounting.
In conclusion, the above Generally Accepted Accounting Principles (GAAPs) apply to institutions of health care as they do apply to other institutions. However, it is worth noting that accounting for healthcare institutions is perhaps the most complex. This is usually complicated by the fact that financing of health care is itself complex (Ward & Finkler, 2006, p.7). Health care institutions receive payment through third parties co0ntrary to other institutions. In health care accounting, charges and revenues are two different things. The financial statements also differ from those of other institutions in that in healthcare institutions net patient revenues are listed first on the statement. The difference is occasioned by how the health centers receive their payments. The sector requires that the accountants and other financial officers get a clear understanding of the unique nature of accounting for health care institutions (Ward & Finkler, 2006, p.9). One needs to be aware of the reimbursement systems, third-party payers, and contractual allowance.
Cleverly, O. 2005. Handbook of health care accounting and finance, volume 1. New York: John Wiley.
Khumawala, B., & Granof, H. 2010. Government and not-for-profit accounting: concepts and practices. New York: Cengage Learning
Ward, M., & Finkler, A. 2006. Accounting fundamentals for health care management. Massachusetts: Jones and Bartlett