In recent years healthcare systems have become more like business entities than health care providers. Technology is continually evolving so is healthcare and its financial approach. Generally Accepted Accounting Principles (GAAP), is a guide used by healthcare providers to account for their financial activities. GAAP is a guideline or a group of objectives and concepts that have evolved over 500 years from the basic concepts of Luca Pacioli set forth in the 1400s (Omar, 2010). It comprises a set of principles that have been developed by the accounting profession. According to Saunders (1993), “Financial Accounting Standards Board (FASB) established the rules and guidelines which require CPAs to indicate whether an audited set of financial statements is in compliance with GAAP” (p. 104). They are five principles and each one will be discussed in relation to healthcare. These are paramount to the effectiveness of business accounting. Accounting principles include the following: accounting entity, money measurement, duality, cost evaluation, and stable monetary unit.
An accounting entity is the business or corporation that performs clear economic activities, separate from any personal economic endeavors (Cleverly, Cleverly, & Song 2011). In health care accounting entities can be surgical centers, hospitals, clinics, home health agencies, nursing homes, or other entities that are part of a larger health care network. An accounting entity requires financial records that define organizations financial activities that are clear and concise. Cleverly, Cleverly & Song (2011) states that if an entity is not properly defined, evaluation of its financial information may be useless at best and misleading at worst. The entity is expected to maintain its accounting records in accordance to GAAP.
Measurement is the process of determining the monetary amounts at which the elements of the financial statements are to be recognized and carried in the balance sheet and income statement as a contribution to the accounting theory of extensive measurement (Scrimnger, & Musvoto,2011). Resources and liabilities have to be considered and calculated to determine accurate money measurement in an organization. These resources are referred to as assets, which include money, buildings and equipment. In health care these assets include, buildings, cash-flow, and equipment. Liabilities will be salaries to the employees and loans owed from banks and any other companies they are in business with. In most normal situations assets exceed liabilities in money measured value (Cleverly, Cleverly & Song 2011). An entity shall not recognize an element of financial statement unless a reliable value can be assigned to it. Duality. This is a fundamental convention of accounting that necessitates the recognition of all aspects of an accounting transaction.
According to Cleverly, Cleverly & Song (2011), “The value of assets must always equal the combined value of liabilities and residual interest, which we have called net assets”. He goes on to explain the basic accounting equation, the duality principle, may be stated as follows: Assets=Liabilities +Net assets. In any given situation the value of assets will always equal the value of claims. Cost valuation. When looking at an organization one needs to know about the assets and their value. When assets are recognized the basis for valuation needs to be determined. The two bases are historical and fair value (Saunders, 1993). The amount paid for the asset is the basis for valuation which is referred to historic and fair value is the amount an asset could be exchanged between knowledgeable willing parties. The firm’s accounting statements reflect the company’s financial status and this is presented in the balance sheet. GAAPs in the United States require the valuation of fixed assets at historical cost, adjusted for any estimated gain and loss in value from improvements and the aging, respectively, of these assets.
As mentioned previously hospitals now operate as business entities, and their accounting operation is the same as any other entity. Stable monetary unit. In any organization, the monetary unit principle assumes that the value of the unit currency in which you record transactions remains stable over time. This concept allows accountants to disregard the effect of in inflation, a decrease in terms of real goods of what the dollar can purchase. Monetary unit assumption makes accounting process manageable however it can be problematic. If in any case the value of money changes rapidly due to market conditions or policy changes, a business’s financial statements may be less useful for comparison with prior records (Omar, 2010).
Accounting focuses on the financial aspects of the business and that too for matters which can be expressed in terms of currencies. Nurse Managers must be able to communicate with financial managers of the organization as they help steer the overall direction of the organization (Saunders, 1993). The health care operation relies on revenues from patients billing and in turn help sustain the business on them and any other income. Health care systems are able to run business successfully by using GAAP guidelines. We have seen in this discussion that the five principles of accounting are essential in daily business operation. The understanding of accounting entity, money measurement, duality, cost valuation and stable monetary unit will help any health organization to manage their finances well.
Cleverly, W. O., Cleverly, J. O., & Song, P. H. (2011) Essentials of health care finance (7th ed.). Sudbury, MA: Jones and Bartlett. Omar, O. (2010). Why Generally Accepted Accounting Principles Should Inform U.C.C. Article 9 Decisions. Texas Journal Of Law Review, 89(1), 207-226. Saunders, G. (1993) Accounting principles (5th ed.). Hoboken, NJ: John Wiley & Sons. Scrimnger, C. C., & Musvoto, S.W. (2011). The Accounting Concept of Measurement And The Thin Line Between Representational Measurement Theory And The Classical Theory of Measurement. Journal of International Business and Economics Research, 10(5), 59-68.