Generally Accepted Accounting Principles Paper Essay
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Generally Accepted Accounting Principles
In a world of finances, Generally Accepted Accounting Principles seem to play a huge role. Generally Accepted Accounting Principles, or GAAP, is defined as the set of guidelines and rules which the financial firms adhere in their work. GAAP is useful due to the nature of being able to standardize the methods for the organizations to follow, and it establishes consistency from year to year in documents such as financial statements (Cleverly, Song & Cleverly, 2011).
Healthcare is inevitably a business like any other according to the authors, and such healthcare organizations are sure to benefit from GAAP.
Cleverly et al (2011), attempts to teach the reader the five of the principles in their work. They are as follows; Accounting Entity, Money Measurement, Duality, Cost Valuation, and Stable Monetary Unit. To apply these essential principles to healthcare organizational settings, it is important to study how each of the principles are defined.
Principle 1: Accounting Entity
It is stated that accounting entity is an organization which is involved in economic activities with own assets and resources which should be accounted (Cleverly, Song & Cleverly, 2011). The authors also state that if the definition is not properly determined, evaluations might become even useless and misleading. Legal entity and accounting entity are different. This means that sometimes it is not apparent for the firms define the accounting entity, as other groups such as universities and government might be involved with the organization as well. Cleverly et al (2011) gives a great example of what could happen if not all aspects are accounted for. In healthcare organizations, the idea of fringe benefits such as bonus wages being paid in municipal basis might not be visible to the hospital’s accounts. This could possibly cause understatement of the expenses, which could affect the finances of the hospital as a whole.
Principle 2: Money Measurement
Measurement of money is not an easy task in a business setting. There are resources essential for running a business and other economic obligations the business has to provide and meet. This could be applied in the same way for healthcare organizations. Assets are usually greater than the liabilities (Cleverly et al, 2011). Liabilities are resources from another entity such as bank loans. With the presence of liabilities, owner’s interests are gained to the entity which provided the loans. When the firms take these elements into account, they should acquire a general idea of the accounting entity’s assets and how they are utilized. When the liabilities are unpaid, then the lenders would then make the equity claims, unless the organization was a non-for profit healthcare organization. There are no equity claims for non-profit HCOs, and they just becomes the property of the state (Cleverly et al, 2011).
Principle 3: Duality
Duality is defined as a simple equation. Assets of the business should equal the liabilities owed plus the net assets. Liabilities and net assets are always counted as assets. It is state that a significant number of HCOs use this principle with different transactions with lenders. Individual asset, liability and net asset always equals the same amount through the duality principle(Cleverly et al, 2011).
Principle 4: Cost Valuation
This principle is used to estimate the value of the business. It involves historical cost, replacement value, and the market value. Although the asset is considered equal to the liabilities and the net assets, its market value is a different story. If the cost of investment is more than the return, interventions need to be made to either sell the assets or continue operation with resource cuts in the operation. Replacement cost would play a huge role in a hospital where the new and better information technologies are being developed constantly. It is likely for the hospital a significant more money to replace the current technology being used and inflation.
Principle 5: Stable Monetary unit
According to the authors Celverly et al (2011), stable monetary unit is the generalized value of a dollar whether it was now or then. For example, the dollar from 2000 would be considered the same value as the current dollar. This however, could cause problems due to inflation. Healthcare organizations could put themselves at significant cash deficit if the management does that put the inflation into account. Healthcare whether it is for profit or not, is still considered a business. Although non-profit HCOs are different at times, the HCOs still require resources, and “Generally Accepted Accounting Principles assists” the HCOs to stay consistent and allows the managements to see the assets as a whole.
Cleverly, W. O., Song, P. H., & Cleverly, J. O. (2011). Essentials of health care finance (7th ed.). Sudbury, MA: Jones and Bartlett Learning..