Generally accepted accounting principles
Health care financial management like that of other industries follows a set of generally accepted accounting principles (GAAP) regardless of whether it is for a profit or non-profit making organization. Health care organizations generate their revenues from delivering services and from the sale of drugs and medical supplies. Expenses in health care organizations normally include but are not limited to the costs related to labor and the purchase of drugs and medical supplies (Hankins & Baker, pp.412-413). These transactions have to be recorded according to the concepts of GAAP. The aim of this essay is therefore is to discuss the following generally accepted accounting principles, accounting entity, money measurement, cost valuation, duality and stable monetary unit. In addition, the intent behind every principle as well as how the principle relates to health care will also be discussed.
Principle of accounting entity
In accounting, financial statements such as balance sheets are prepared for a specific entity. The accounting entity therefore refers to the organization for which the financial information and statements are prepared, recorded and reported. Specification of the entity is intended to define or draw a boundary as to which information is pertinent as far as accounting for a particular entity is concerned. For instance, when preparing financial statements for a health care institution called XYZ hospital, the accounting entity is XYZ hospital. In essence therefore, the accounting entity principle is a concept that expresses that the entity in this case a health care institution is capable of undertaking economic transactions independently that is; separate from the individuals running it. Definition of the accounting entity is very critical when it comes to health care because the process is not as clear cut as it seems. This is because hospitals have very different ownerships for instance some are owned by physicians, others by municipalities, universities or government agencies. In this regard, failure to properly define the accounting entity would mean that information garnered through financial evaluations of such entities maybe erroneous and misleading (Cleverley, Cleverley & Song, 2011, p.188; Berger, 2008).
Principle of cost valuation
The principle of cost valuation requires all financial transactions to be recorded at their historic or original acquisition price for instance, the original price at which an item was bought. The historic price is preferred to other valuations like current sale price and replacement cost because it is objective, determinable, verifiable and definite unlike the latter two which may be subject to conjecture or opinion. It is therefore meant to achieve uniformity and objectivity in the process of accounting by avoiding the chaos that the use of other valuations like current sale price might bring. This implies that the assets of a health care institution such as buildings and equipment are recorded in the financial statements at their historic price. However, for future decision-making purposes, the replacement cost is more preferable because it perceived to reflect the true value of the assets (Cleverley, Cleverley & Song, 2011, p.185; Berger, 2008).
Principle of duality
Meanwhile, the principle of double entry or duality simply states that every transaction has a double effect on the financial position of the specific accounting entity. As such, it requires that the two aspects of each transaction be reflected in the accounting record that is the change in both assets and liabilities must be entered. The duality principle is intended to ensure that the basic accounting principle of assets being equal to the sum of the liabilities and residual interest/net assets remains balanced. In health care, this principle has been applied through the creation of charts of accounts which consists of a list of the individual dual entries for all items. These charts of accounts are useful tools for categorizing transactions related to health care organizations. As a matter of fact, the charts of accounts used by various health care institutions such as hospitals have significant uniformity (Cleverley, Cleverley & Song, 2011, p.185; Berger, 2008).
Principle of money measurement
The principle of money measurement states that the accountant’s yardstick for measuring of economic resources and liabilities as well as their changing levels is exclusively money. The expression and valuation of the economic resources as well as other factors of the entity in monetary terms is intended to provide a common denominator on which the impact of changes in the value of these resources can be objectively assessed. The assets and liabilities of health care entities like those of other accounting entities are also recorded in monetary terms. Other significant events affecting health care organizations and its financial position in particular but cannot be quantified in monetary terms can therefore not be recorded in accounting (Cleverley, Cleverley & Song, 2011, p.184).
Principle of stable monetary unit
Whilst the concept of monetary measurement restricts accounting measures to money, the principle of stable monetary unit also requires that accountants record only those transactions that can be quantified in terms of currency. It goes a step further by presuming that the value of the particular unit of currency remains stable over time. This means that impact of inflation on the unit of currency is not considered when making accounting computations despite the knowledge that inflation results in currencies lose their purchasing power over time. This principle is purposed to make the comparison of transactions easy and to ensure that the basic accounting equation remains balanced. In essence therefore, this principle enables health care organizations to maintain a positive working balance that is assets/revenues will always be more than liabilities/claims. In other words, factoring in of the rate of inflation during accounting computations would imply that the accounts of health care organizations would after some time have significant cash deficits that would in turn render them inoperable (Cleverley, Cleverley & Song, p.188).
In conclusion therefore, the accounting principle of accounting entity demarcates the boundaries of the organization for which accounting records are prepared and maintained. The concept of duality on the other hand simply recognizes that any financial transaction has a double effect on the financial position of a particular entity. Meanwhile, cost valuation requires that transactions be recorded at their historic price. The concepts of stable monetary unit and money measurement are almost similar in meaning requiring that transactions be quantified in monetary terms. The principle of stable monetary unit goes a step further by presuming that the value of the unit of a currency is not affected by inflation and thus remains stable over time. Although there are various reasons behind the different principles, their major intent is to always ensure that the integrity of the basic accounting equation for a particular entity such as a health care organization is always maintained regardless of whether it is non-profit or profit oriented.
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Cleverley, W., Cleverley, J.O., & Song, P.H. (2011). Essentials of health care finance (7th ed.).
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Hankins, R.W., & Baker, J.J. Management accounting for health care organizations: Tools and
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