Financial matters or accounting procedures are a daily part of running any business. Whether that business is a mom-n-pop hardware store or a large medical center that serves hundreds of thousands of patients a year, tracking finances is an important part of daily business.
Accounting practices and principles are at the heart of financial management. To understand the financial transactions of healthcare organizations it is necessary to understand the different types of accounting practices and how entries are made and items recorded using each practice. Accrual accounting, cash flow accounting, and fund accounting are three practices used by healthcare organizations to manage finances.
According to the Bureau of Labor Statistics (2008-09), accountants and auditors help to ensure that the Nations firms are run efficiently, its public records kept accurately, and its taxes paid properly and on time. All accounting transactions are recorded through journal entries that show account names, amounts, and whether those accounts are recorded as a debit or credit side of accounts. Debits include all money or revenue going out and credits are all money or revenue coming in.
Accrual accounting, in simple terms, means that a profit is recognized at the time that a service is rendered and not when the actual monies are given or taken away. For example, when a patient is cared for in a hospital and receives treatment because they have insurance, that service is recognized as a profit just as if that very patient were to have paid cash for the same treatment. Hospitals provide services for specific fees; these fees are either paid for out-of-pocket or through some type of insurance. Revenue is realizable because it is reasonable to expect that cash will be received in the future.
Accrual transactions are typically entered into the current accounting period, for example the month of February, and reversed in a future period, usually the next month. When the invoice has been processed or when the revenue has been processed.
Cash flow is one of the most important parts of any business. However, cash flow and profit should not be confused. Cash flow shows the money coming into an organization through sales, receipt of interest payments, and any money borrowed as well as the amount of money flowing out of a business through paying for wages, rent, interest owed, loan payments, buying materials, and so forth.
If the cash flowing out of a business is more than the cash flowing in the organization will eventually be unable to meet its debts and it will be forced to close. The cash flow statement organizes and reports the cash generated and used through operating activities, investing activities, financing activities, and supplemental information.
Finally, the practice of fund accounting serves any non-profit organization and public sector. It is a method of segregating resources into categories to identify both the source of the funds and the use of the funds. These types of organizations have a need for special reporting to financial statement users that show how money is spent, rather than how much money is earned.
This accounting practice divides into different entities which include governmental funds, proprietary funds, and fiduciary funds. Fund accounting can be tedious however, it is recommended for all government entities. A non-profit organizations basic financial statement consists of a statement of net assets, statement of revenues, expenses and changes in net assets, and statement of cash flow.
All accounting practices have their strengths and weaknesses. Each individual organization has to figure out which practices serve them best and which ones will keep their records as pristine as possible. An organization is only as strong as the books it keeps because this is where all of the financial information is stores.
As stated earlier if the money out is less than the money in the business will fail. Accountants have their work cut out for them; it is not an easy job to track the money flowing in and out of a business thus making sure that there is enough revenue to pay employees as well as run the organization itself. Over time certain practices work better than others and trial and error come into play when utilizing accounting practices.
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