September 26, 2023

Define the terminology used in the language of accounting.

Chapter 4

Basic Accounting Concepts

Harrison, Introduction to Health Care Finance and Accounting, 2nd Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Chapter Objectives

After completing this chapter, you should be able to:

Define the terminology used in the language of accounting.

Explain the basics of double-entry accounting, with every entry into the financial records requiring an equal and offsetting debit and credit.

Describe the major differences between manual and computerized accounting systems.

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Introduction (1 of 2)

Accounting is the language of business

Codified by Luca Pacioli, “the father of accounting,” in his Summa (1494)

Understanding language of accounting beneficial to healthcare professionals

Bookkeeper vs. accountant

Bookkeepers record financial transactions

Accountants review and approve bookkeeping entries, prepare financial statements, present financial reports and analyses to top management, and design and enforce financial internal control procedures to safeguard financial resources.

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Introduction (2 of 2)

Accounting systems

Manual: Businesses write transactions in bound ledgers or journals and prepare reports manually

Computerized: Businesses enter data into financial management programs and use the software’s reporting features

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Figure 4-1 Double-Entry Accounting (1 of 8)

Double entry accounting is based on the equation:

Assets: Items owned by the business

Liabilities: Items owed by the business

Net worth: The difference between assets and liabilities

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Double-Entry Accounting (2 of 8)

Every financial event is recorded with a two-part entry

Each entry is self-balancing with a debit and a credit

Debit Credit

Asset increase X

Asset decrease X

Liability increase X

Liability decrease X

Revenue (Net worth increase) X

Expense (Net worth decrease) X

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Double-Entry Accounting (3 of 8)

A trial balance is a listing of all account balances as of the date of the trial balance.

When the debit and credit totals are equal, the financial system is in balance.

When the totals do not balance, the accountant must find and correct any errors.

Types of double-entry accounting transactions for a physician’s practice

A revenue transaction is recorded when a patient makes a payment.

The entry is recorded as debit to Cash and a credit to the appropriate net worth account (e.g., Medical Services).

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Double-Entry Accounting (4 of 8)

Accounts receivable transactions generally are made when services are reimbursed by an insurance company and require two transactions:

When services are billed, a debit is made to Accounts Receivable, and a credit is made to the appropriate net worth account (e.g., Medical Services).

When payment is received, a debit is made to Cash, a credit is made to Accounts Receivable, and any difference between the two is debited to the net worth account (e.g., Medical Services).

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Double-Entry Accounting (5 of 8)

Accounts payable transactions generally are made when an expense on account is incurred by the practice.

When a purchase is made, a debit is made to the appropriate expense account (e.g., Medical Supplies Expense), and a credit is made to Accounts Payable.

When payment is remitted, a debit is made to Accounts Payable, and a credit is made to Cash.

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Double-Entry Accounting (6 of 8)

Capital asset transactions involve items owned that have a long useful life and cost more than a minimal amount.

A capital asset purchase is recorded as debit to the appropriate asset account (e.g., Land, Buildings, Furniture, Equipment) and a credit to Cash.

Most capital assets lose value over time and are depreciated.

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Double-Entry Accounting (7 of 8)

Banks loan transactions occur when a medical facility borrows money to meet ongoing costs or to finance a major purchase.

When the money is borrowed, a debit is made to Cash, and a credit is made to a new liability account (e.g., Bank Loan).

When the loan is repaid (usually in installments), the entry requires a debit to the liability account, a debit to an expense account for the interest due, and a credit to Cash for the total.

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Double-Entry Accounting (8 of 8)

The four steps to properly account for any transaction:

Step 1: Identify the accounts to be used.

Step 2: Identify the amount(s).

Step 3: Assign debits and credits.

Step 4: Ensure that debits and credits balance.

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Knowledge Check Activity 4.1

Elderberry Dental Services buys a new piece of X-ray equipment for the office. They pay $89,000 in cash to acquire this equipment. Based on the accounting equation, what would be the effect of this transaction?

Cash +$89,000, Equipment +$89,000

Cash -$89,000, Equipment +$89,000

Cash +$89,000, Equipment -$89,000

Cash -$89,000, Equipment -$89,000

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Instructions:

Use the Knowledge Check questions to periodically pose a question to students during class to gauge how well they can recall the material that was presented.

Knowledge Check Activity 4.1: Answer

Answer: b. Cash -$89,000, Equipment +$89,000

Cash would decrease by $89,000, and Equipment would increase by $89,000.

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The Role of the Accountant in the Financial Process

Medium-sized and larger medical facilities need accountants who:

Review and approve bookkeeping.

Prepare financial statements and analyses for management.

Establish and monitor controls to safeguard the assets.

Publicly held corporations and government facilities are audited annually.

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Computerized Accounting Systems in Healthcare (1 of 5)

Practice Management System (PMS)

Computer software programs designed for medical practices

Supports a database function for all of the patient information

Maintains schedules

Files insurance claims

Generates patient billings

Automatically updates the accounting records

Can buy “off-the-shelf” or customized system

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Computerized Accounting Systems in Healthcare (2 of 5)

Procedure for manual accounting:

Each transaction written into appropriate journal

Journal totals calculated manually, and summary totals posted to general ledger

Trial balance prepared at end of accounting period

Adjusting entries (e.g., depreciation) prepared and posted at end of accounting period

Worksheet prepared and used to generate the final trial balance

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Computerized Accounting Systems in Healthcare (3 of 5)

Final trial balance used to prepare financial statements for accounting period

Journal entries prepared and posted to close revenue and expense accounts and prepare for the next accounting period

Post-closing trial balance prepared

Revenue and expense accounts have zero balances

Ending asset, liability, and expense account balances become beginning balances for new period

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Computerized Accounting Systems in Healthcare (4 of 5)

Procedure for computerized accounting:

Each transaction keyed into appropriate journal

Journal totals automatically posted to general ledger

User can request a trial balance at any time

Journal entries entered at end of accounting period

Final trial balance generated

Program prepares and posts closing entries to zero out revenue and expense accounts

Post-closing trial balance generated

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Computerized Accounting Systems in Healthcare (5 of 5)

Computerized accounting system benefits:

Automation of bookkeeping functions

Accurate totals

Error-avoidance by linking vendor codes to specific accounts

Computerized accounting system needs:

Trained personnel who know what types of transactions go into each account

Oversight by an accountant

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Knowledge Check Activity 4.2

All of the following can be handled by a computerized accounting system except:

Handling basic patient information.

Preparing insurance claims.

Billing patients for balances due.

Reviewing transactions for accuracy.

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Instructions:

Use the Knowledge Check questions to periodically pose a question to students during class to gauge how well they can recall the material that was presented.

Knowledge Check Activity 4.2: Answer

All of the following can be handled by a computerized accounting system except:

Handling basic patient information.

Preparing insurance claims.

Billing patients for balances due.

Reviewing transactions for accuracy.

Answer: d. Reviewing transactions for accuracy.

What the computer is not able to do is tell the difference between a business transaction posted to the appropriate account and one that is not.

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Self-Assessment

Compare and contrast the duties of a bookkeeper and an accountant.

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Instructions:

Use the Self-Assessment question to encourage students to evaluate their progress or goals in the course, as well as determine how they might apply their learning or grow as an individual.

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Define the terminology used in the language of accounting.

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