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Cash vs. Accrual Accounting for Healthcare Organization

Hospitals and home care organizations have two distinctly different modes of operation. Whereas hospitals offer a plethora of treatments ranging from rudimentary health check-ups to long-term ambulatory care, home care organizations namely provide visiting nurses to perform procedures, provide instructions, and generally oversee the state of health of the patient (Jones, Finkler, Kovner, & Mose, 2018). The amount of work done, the methods in which services are provided, and the capacity for payment in patients are different for hospitals and home care, warranting different methods of payment. The purpose of this paper is to address the positive and negative effects of cash vs. accrual payment methods for both organizations.

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Positive and Negative Effects of Using Cash vs. Accrual Payment Methods

Cash method is one of the simplest accounting methods available – the cash received from the client becomes the cash reported in the balance sheet (McCool, 2019). Large organizations that provide numerous services that typically take time to perform typically utilize accrual accounting, which stands for balancing money for when the service is provided, not when it is received (McCool, 2019). Home care organizations typically use the cash method, whereas the accrual method is reserved for larger hospitals (Jones et al., 2018). They come with their own positive and negative effects. The cash method allows the organization to always have money on balance and understand how much they currently have. It is also simple to maintain. On the other hand, if patients cannot pay right now, and pay at the last possible moment, it creates a discrepancy of evaluating when the money was received versus when the work was done. Accrual payment system allows managing numerous services being performed at the same time, and balancing the money being owed to the company rather than the money they have (McCool, 2019). Its positive side includes a more accurate and realistic account of how much money is being spent over a period of time. The negative side is that positive accrual reports may hide the fact that the company’s bank account is empty.

Choices of Revenue Recognition and Matching Principles

Home care organizations and hospitals make different choices in regards to revenue recognition due to their service provision methods. Since home care is typically run by smaller companies, they require money to be paid immediately to pay for expenditures and compensate nurses for their work (Jones et al., 2018). Due to the visiting nature of the provided service, they can be paid per visit, which falls well into the cash method of paying. Hospitals, on the other hand, tend to provide long-term care options for people with injuries or serious diseases (Jones et al., 2018). The outcomes of such treatments are typically unknown, and additional expenditures cannot be projected ahead of time. Therefore, payment is usually provided after the service has been delivered in full, upon discharge. Accrual payment method accounts for that and allows the hospital to manage money they did not yet receive.

Comparing and Contrasting Different Items

Gross revenue stands for the amount of money received before various expenses and taxes are deducted (Warren, Jonick, & Schneider, 2020). Cash method allows seeing gross revenue more clearly. Net revenue, on the other hand, is what remains after associated expenses for the product or service have been satisfied (Warren et al., 2020). By definition, gross revenues are larger than net revenues. Patient service revenue is split into gross and net revenues, the former being the revenue estimated from the patient prior to treatment, whereas net revenue is that minus the revenue the hospital is unable to collect (Jones et al., 2018). The uncollectable debt, which requires the utilization of special contractors is called bad debt (Jones et al., 2018). Charity care, on the other hand, is characterized by positive social outcomes, and indirect income through increases in donations (Jones et al., 2018). Bad debt, when collected, is good for sheets, but bad for PR. Charity care is bad for balance sheets, but good for PR.

References

Jones, C., Finkler, S. A., Kovner, C. T., & Mose, J. (2018). Financial management for nurse managers and executives. Elsevier Health Sciences.

McCool, C. (2019). Cash-basis accounting vs. Accrual accounting. Web.

Warren, C., Jonick, C., & Schneider, J. (2020). Accounting. Cengage Learning.

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StudyCorgi. (2022, February 26). Cash vs. Accrual Accounting for Healthcare Organization. Retrieved from https://studycorgi.com/cash-vs-accrual-accounting-for-healthcare-organization/

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StudyCorgi. (2022, February 26). Cash vs. Accrual Accounting for Healthcare Organization. https://studycorgi.com/cash-vs-accrual-accounting-for-healthcare-organization/

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StudyCorgi. 2022. "Cash vs. Accrual Accounting for Healthcare Organization." February 26, 2022. https://studycorgi.com/cash-vs-accrual-accounting-for-healthcare-organization/.

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StudyCorgi. (2022) 'Cash vs. Accrual Accounting for Healthcare Organization'. 26 February.

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