Managing finances occupies a substantial area in all healthcare organizations due to the significance of real numbers to determine future practices, investments, and expenditures. Two different methods are used in various types of healthcare institutions, which are cash and accrual accounting basis. Still, most healthcare providers use the accrual method because it is believed that it “does a better job measuring profits for a specific period” (Finkler et al., 2018, p. 46).
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There are numerous types of healthcare facilities in the industry, including hospitals, specialized private clinics, nursing homes, dental offices, and others. This paper will focus on analyzing the advantages and disadvantages of integrating accrual versus cash accounting methods in private physician practices and public hospitals, observing the effects on revenue recognition and income statement elements.
First, it is critical to distinguish between cash and accrual basis for financial management. Cash accounting implicates that revenues and expenses are recorded when they are collected or paid, while the accrual method requires recording those when the service takes place (Finkler et al., 2018). Consequently, those two approaches differ in terms of profit recognition. In a private physician practice, cash accounting seems to represent a more beneficial management structure, because it helps to escape bad debt, which can be crucial for the private practice’s profitability. Still, it can happen that the professionals have already performed a service, and their salaries were written as expenses, while the patients have delays in payments.
Thus, the income statements for a specific period might not match reality, and a private clinic can seem to have challenging financial times. Although cash accounting does not follow the matching principle, it is valid for private practices because they carefully check the patient’s background and ability to pay, which reduces the likelihood of delays.
Another example of a healthcare institution chosen for the analysis is a public hospital. As mentioned in the introduction, most healthcare providers integrate accrual accounting, which can be justified by the fact that it provides the matching. Hospitals tend to use this financial management approach because it “provides a better measure of the profits” and is “less open to manipulation” (Finkler et al., 2018, p. 46).
Besides, hospitals might mark unpaid revenues as charity care, instead of having bad debt losses, which has a high social value, positively influencing the hospital’s image. Another crucial aspect is the use of cash flow statements, along with the accrual method. An example is when a hospital takes a loan, which is neither revenue nor expense but is a liability (Finkler et al., 2018). It is why it is essential for this type of organization to track the inflows and outflows of cash. Hence, the accrual basis offers numerous benefits for healthcare organizations.
The next important point is to look at gross and net revenues. In the case of private practices using cash accounting, gross revenue, and, consequently, net revenue can be significantly lower if the facility is experiencing payment delays. Specifically, patient service revenue can be lower on the income sheet, which can deter revenue recognition for the organization. It is also important to remember about experiencing bad debt losses, which can happen in using cash accounting methods and can decrease the revenues substantially.
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In the case of public hospitals that implement accrual accounting, gross revenues match the real financial assets, while net revenues can be lower. It happens because the expenses can be recorded and paid at different times, but the net revenue implies withdrawing all documented costs. Another point is that hospitals can also use the accrual method to their benefit if they seek philanthropic investments (Finkler et al., 2018).
In this case, the hospitals can have numerous immediate expenses, which will substantially reduce their net revenues and will make the facility look in need, thus needing resources. In conclusion, both cash and accrual method have their positive and negative sides for different types of healthcare providers. It is critical to consider all the operations involved, carefully control cash flow statements and chose the approach that better suits a specific case.
Finkler, S. A., Calabrese, T., & Ward, D. M. (2018). Accounting fundamentals for health care management (3rd ed.). Jones & Bartlett Learning.