Regulatory boards such as the Financial Accounting Standards Board (FASB) have developed frameworks that seek to formalize systems of accounting used by different types of organizations. These frameworks aim at monitoring and regulating the recording, reporting, and preparation of financial statements in various organizations. Key among these frameworks is the Generally Accepted Accounting Principles (GAAP), which are a set of rules and procedures developed by the FASB to standardize the preparation of financial statements during the financial accounting process. This paper shall set out to discuss the GAAP and its relevance in the healthcare industry.
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GAAP in Healthcare
According to Finkler, Kovner, and Jones (2007), GAAP provides a financial accounting framework used to guide organizations when preparing their balance sheets, statements of operation, cash flow statements, and changes in net assets statements. Cleverly, Song, and Cleverly (2011) assert that these primary statements facilitate an organization’s ability to document its financial health, as well as its viability as an existing financial entity. GAAP is made up of the eight basic accounting principles mentioned and discussed below.
The entity concept sets out to ensure that financial statements include a clear definition of the organization. In this case, the organization is referred to as an entity. Under this principle, a healthcare organization may be viewed as an entity. However, due consideration should be given to the fact that there might be subsidiary financial entities such as hospitals and medical schools among other facilities, which might be keeping independent financial records. Considering that these subsidiaries are part of the overall organization’s financial structure, this concept seeks to ensure that such entities are clearly defined in the financial statements (Berger, 2008).
The main intent of this principle is to ensure that cost valuations over time are reflected appropriately in the financial statements. This principle assumes that an organization is financially viable and will continue conducting its operations over time. As such, if an organization is bound to fail, this principle advocates that such information be presented adequately because the assets of failing organizations lose their value upon failure (Finkler, Kovner, & Jones, 2007).
According to Cleverly, Song, and Cleverly (2011), this principle requires organizations to use accrual accounting when recording expenses and their revenues in the same year. This enables accountants to match the expenses and revenues for the year accordingly. Accrual accounting enables organizations to input fixed asset depreciation, as well as uncollected revenues in their financial statements (Finkler, Kovner, & Jones, 2007). This is very convenient for healthcare organizations, which have to wait for unknown periods before receiving payments from third-party payers such as governments, donors and sponsors.
According to Berger (2008), the cost principle requires the organization to record the cost of assets and resources according to their original purchase price. Cleverly, Song, and Cleverly (2011), state that cost valuation is the most objective method used to value assets and liabilities, as compared to market and replacement value. Since healthcare organizations buy equipment that will be used over a long period, this principle enables them to be objective about their assets’ value.
This principle dictates that there must be sufficient and verifiable evidence to support the information presented in an organization’s financial statements (Ferris & Wallace, 2009). Considering that an MRI machine’s value may be determined by its current market or replacement value, recording its value of the acquisition is more objective and verifiable than the other two options. This is attributed to the fact that users can agree and provide objective evidence on such assets.
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This principle is based on the fact that accounting can never be error-free. As such, the main intent of this principle is to minimize errors by ensuring that omissions and estimates are at a level that would not change the decision made by users of such information ((Finkler, Kovner, & Jones, 2007). For example, an accountant in a healthcare facility may decide to omit a $50 charge used to buy printing papers. Such a cost is considered immaterial if the organization deals with large sums of money.
Cleverly, Song, and Cleverly (2011), state that this principle advocates for a standardized system of accounting that remains similar over time. According to the authors, the accounting choices for a particular transaction should remain the same while recording such transactions. This aims at avoiding confusion among stakeholders that are not conversant with accounting terminologies (Ferris & Wallace, 2009).
According to Finkler, Kovner, & Jones (2007, p. 106), this principle states that financial statements “should be a fair representation of the financial position of the organization using GAAP.” This principle advocate for accuracy and honesty in the preparation of an organization’s financial statements.
Like any other organization, healthcare organizations are expected to follow these principles whenever they prepare their financial statements. These principles enable organizations to prove to their stakeholders that they are financially viable, reliable, and transparent in all their operations. The GAAP presented herein enables organizations to accurately account and display their financial health.
Berger, S. (2008). Fundamentals of Health Care Financial Management: A Practical Guide to Fiscal Issues and Activities. New Jersey: John Wiley & Sons.
Cleverly, W., Song, P., & Cleverly, J. (2011). Essentials of healthcare finance. New York: Elsevier.
Ferris, K., & Wallace, J. (2009). Financial accounting for executives. Ontario, CA: Cambridge Business.
Finkler, S. A., Kovner, C. T., & Jones, C. B. (2012). Financial management for nurse managers and executives. St. Louis, MO: Elsevier Health Sciences.