Accepted Accounting Principles related to Health Care - Essay Example

These rules were established by the Financial Accounting Standards Board. The first principle is the entity concept which is the group or organization such as a hospital, medical school, or nursing home. Inother words, it separates the business from its owners and treats it as an economic unit. Only assets, liabilities, and owner's equity related to the group or organization are on one financial statement. If there are sub entities, the financial records of these entities are maintained separately.

The second principle is the going - concern concept which is a presumption that the group or organization will be running in the future and will not be liquidated in the next 12 months. It is a very concept in case of healthcare business because hospitals, nursing homes, etc. which do not intend to stay in business the net realizable value of the asset may be not ascertained and could be sold at a much higher price than they worth at the moment of sale. The third principle is the matching principle which is a combination of cash accounting and accrual accounting.

The matching principle and cash accounting states that revenue or expenses are recognized only when the organization receives cash or pays cash. For example, medical equipments are recognized in the books of accounts only when the cash is paid out in entirety. The problem therefore is, all transactions that are not done on a cash basis and not done in the same accounting year are not recognized which gives a deceptive picture of what actually occurred a respective accounting year. On the other hand, when accrual accounting is done this gives the actual as to what occurred in that year.

An example of this is if an organization provides care for a patient but does not receive reimbursement until the following year but the funds will be documented on the year the patient was cared for. The fourth principle is known as the historical cost principle and states that the cost of a resource is what the organization pays to receive the economic need. Historical cost does not reflect the current market valuation of the asset. Therefore the problem with the cost principle for example is if a hospital pays twenty dollars for I.V. tubing in the current accounting year and the following year that same tubing costs thirty dollars.

This will not show a real account of the asset because of the variation in price. The fifth principle is called objective evidence. This principle states that evidence can be reported on financial statements that are objective in nature and can be analyzed, measured, observed and verified. An example of this is the cost of an EKG machine but the problem is the amount that it is worth as an asset. Do you use what the organization paid for it, what it is worth, or how much you could sell it for if the hospital did not need it?

All of these are subjective views and most accountants use the value of what an asset is at cost. Fair market value is what the GAAP prescribes in recognizing the value of the asset. Materiality is the sixth principle which states that an organization will have accounting errors but the error will not be to an amount that items that would affect the direct value of the organization depending on several factors such as size of the organization It tries to conform to the situation wherein the information that might have been omitted in the financial statements does not bear any influence on the economic decision of the users of these financial stateme