Question-1 – The Difference between Accounting Methods and Their Effects
These two accounting systems reflect the timing of the period in which the revenue stream and the operating expenses are recognized in the financial statements of a healthcare entity. The major difference between these systems is that the accrual accounting system recognizes revenues in the period during which they are earned regardless of whether the actual cash is received or not. Similarly, this accounting method reports expenses in the period in which they expire irrespective of the cash payment.
In contrast, a healthcare organization using a cash basis of accounting recognizes the revenue stream in financial statements only when the cash is received. In the same way, cash basis of accounting reports expenses on financial statements only when the cash is paid out in full .
The accrual basis of financial reporting affects statements in a manner where the revenue and expenses affect the income during the same period in which they are accounted for. However, the cash basis of reporting affects the income and financial statements where revenue and expenses are reported only when the cash is exchanged which may give a rise to the bad debts of a healthcare organization because of the realization of an unearned income in the balance sheet.
Question-2 - Four Basic Financial Statements for Healthcare Manager
For managers of any organization who investigate the financial performance of the entity use four kinds of financial statements after organizing the business information . These include:
- The statement of income/activities which helps the healthcare manager to examine and compare the level of revenue, operating expenses, losses as well as gains from operations reflecting how much profit or loss the healthcare organization has made during the period.
- The balance sheet that assists the healthcare manager to measure the financial position at end of the accounting period by comparing the assets against liabilities and equity.
- Cash flow statement reflects the cash inflow and outflow into the healthcare organization from and to different activities like investment, financing and operations. It also helps the manager to determine the cash left with the business at end of the accounting period.
- The statement of retained earnings helps analyze the portion of earnings retained for reinvestment into the healthcare services or respective contingencies.
Ehrhardt, M., & Brigham, E. (2008). Corporate Finance: A Focused Approach. Cengage Learning.
Weil, R., Schipper, K., & Francis, J. (2012). Financial Accounting: An Introduction to Concepts, Methods and Uses. Cengage Learning.