Generally Accepted Accounting Principles - Research Paper Example

Generally Accepted Accounting Principles Related To Health Care Generally Accepted Accounting Principles Related To Health Care Generally accepted accounting principles, (GAAP) refers to a common set of accounting principles, standards and procedures that all companies and public organizations use to prepare and standardize the reporting of financial statements, such as balance sheets, income statements and cash flow statements across the globe (Paul, 2008). GAAP defines the common accounting procedures that accountants use to record and present accounting information (Wilder & Mauldin, 1999). Notably, GAAP applies in all sectors including the health sector where they seek to attain complete disclosure and uniformity in health finance (Fischer, 1997). Nevertheless, only specific generally accepted accounting principles apply in the health sector where they define how healthcare entities prepare their financial statements (Kramer, 2014). As such, this paper will only address the principle of creditworthiness, disclosing assets and liabilities, establishing financial stability, and bargaining power, which have a direct relationship with health care (Richards, 2014). I will describe each of the named principle, define its intention, and relate it to health care. Creditworthiness is a generally accepted accounting principle that applies in health care. This principle compels accounting officers to compare the reference business with other businesses within the same industry (Richards, 2014). This comparison may relate to the profitability of the business, revenues, operating costs, market position, and assets and liabilities. By comparing the reference business with other businesses in the same industry, this principle seeks to establish the performance of the reference business with respect to the performance of the industry. This helps in determining the credit worthiness of the reference business in comparison with other businesses in the same industry. This principle is applicable in the health sector in that it allows insurance agents and financial institutions that provide services to the health aid business to compare this business with other businesses in the health and medical industry with an aim of establishing its creditworthiness (Richards, 2014). This helps in measuring the financial strength of a business or organization in the health sector. Indeed, this principle helps in comparing the revenues of different companies in the health sector. Through this principle, we can establish the projected revenues in the health sector, which defines creditworthiness. Establishing financial stability is another generally accepted accounting principle that applies in health care. This principle compels business entities within the same industry to use the accrual method in preparing and presenting accounting information (Richards, 2014). This principle is very fundamental in accounting since it allows companies to record and present all revenues that the companies receive including the outstanding revenues (Richards, 2014). This applies where a company has a guarantee of receiving some money but that money is yet to arrive. Such money would make a huge net worth if not recorded. As such, this principle allows companies to derive the capacity to show acquired and guaranteed revenues (Wilder & Mauldin, 1999). This principle relates to the health sector where health institutions that use accrual method (Mellett & Williams, 1997) to derive the capacity to show an acquisition or guaranteed money that is outstanding and not defaulted by patients, such as a charitable donation or a government grant (Richards, 2014). Indeed, this principle equally allows health care entities to report the estimated claim liability and related insurance recoveries at their gross amounts (Lattimore Black Morgan & Cain, PC, 2012). Notably, the health sector enjoys guaranteed charitable donations and grants that may influence the net worth of the institution when they arrive. This principle ensures that health entities present the true picture of their revenues and liabilities. The requirement to disclose all assets and liabilities is a generally accepted accounting principle that applies in health care. This principle mandates business entities to disclose the net value of all assets and the accrued liabilities (Richards, 2014). Disclosure is a fundamental aspect in accounting. By disclosing the net value of the assets, accountants will have addressed depreciation and other costs that may reduce the value of assets (Fischer, 1997). Through this principle, accountants only present the true value of the company assets. Moreover, the principle seeks to encourage business entities to record and present monies received from other sources like charitable donations and pledges from donors (Richards, 2014). It is therefore clear that this principle relates to the health sector in that it mandates all health entities to disclose the net value of assets in the health organizations. Notably, most machines and equipment in the health sector accrue huge depreciation and hence the need to account for this. This principle requires health entities to use the cost basis measurement for charity care, expanded charity care disclosure, and disclose the amount of contributions and grants received to fund uncompensated care (Lattimore Black Morgan & Cain, PC, 2012). The recording of such donations will disclose the true value of the organization. Ultimately, the bargaining power in case of a merger or takeover is another generally accepted accounting principle that applies in health care. This principle reckons that mergers and takeover of small businesses are inevitable in a business environment. This principle allows business entities to show a long-term cash on hand operating budget in the presentation of accounting information (Richards, 2014). Indeed, the principle plays a huge role in accounting by ensuring that accountants report service revenue and the related patient accounts receivable, including amounts due from third-party payers (Kramer, 2014). The intention of this principle is to leverage in the process of merging or taking over small businesses by corporations. As such, the principle helps in formulating a contractual agreement between two business entities. This principle relates to the health sector in that it helps health entities to develop contractual agreements in case of mergers or takeovers (Richards, 2014). By compelling health entities to show a long-term cash on hand operating budget, which includes service revenue and the related patient accounts receivable the parties in a merger in the health sector will have a clear picture of the financial status of the companies involved. When large health organizations want to merge or take over small health facilities for business purposes, this principle will ensure that all the parties get the fairest value of the deal. References Fischer, M. (1997). Two accounting standard setters: One industry. Journal of Public Budgeting, Accounting & Financial Management, 9(2), 251-284. Kramer, J. (2014). Accounts Receivable from Third-Party Payers - A GAAP Refresher. Retrieved from: http://southfloridahospitalnews.com/page/Accounts_Receivable_from_ThirdParty_Payors__A_GAAP_Refresher/7434/1/ Lattimore Black Morgan & Cain, PC. (2012). Accounting Standards for Health Care Entities to Become Effective. Retrieved from: http://www.lbmc.com/newsletters/notforprofit/ConduitSummer2012.pdf Mellett, H., & Williams, J. (1997). Accountability and the accounting regime in the public sector some messages from the NHS. Journal of Management in Medicine, 11(5), 269-278. Paul, S. (2008). General Accepted Accounting Principles or GAAP: What does it mean? Retrieved from: http://www.legalzoom.com/business-management/running-your-business/general-accepted-accounting-principles-or Richards, J. (2014). How Does a GAAP Aid in Health Care? Retrieved from: http://smallbusiness.chron.com/gaap-aid-health-care-36841.html Wilder, W. M., & Mauldin, D. S. (1999). The multiple sources of GAAP for health care organizations: Current and future. The Government Accountants Journal, 48(3), 10-17. Read More