Cost accounting systems are designed to provide different measures of cost for different decision-making purposes. Assess how understanding cost behavior will help healthcare financial managers help their organizations achieve financial viability overall. 
To prepare for this Discussion:
Identify one example of an event that has changed the operations of your organization or an organization with which you are familiar with. If you are not currently working in a healthcare organization (HCO), you may choose a case study from a reliable source from which to work.
Review this week’s Reading and Learning Resources.
Post a cohesive response to the following:
Assess how the understanding of cost behavior will enable healthcare financial managers to help their organizations achieve financial viability in the long run.
Respond and continue the Discussion through Day 7: 
Expand on this Discussion by highlighting differences between your posting and your colleagues’ postings. Provide additional insights or alternative perspectives.
The initial post must require a minimum of four (4) current quality references, two (2) of them from peer-reviewed articles from the UC online library. Including references in your replies to classmates is optional but recommended.
Chapter
Basic Accounting
Concepts
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4
Objectives
• Upon completion of this chapter, you will
be able to:
– Recognize accounting terminology
– Explain double-entry accounting
– Differentiate between manual and
computerized accounting systems
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2
Introduction
• Accounting is the language of business
– Healthcare is a business
– Understanding language of accounting
beneficial to healthcare professionals
• Bookkeeper vs. accountant
– Bookkeepers record financial transactions
– Accountants approve bookkeeping entries,
prepare financial statements and analyses,
design financial safeguards, etc.
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3
Introduction (cont’d.)
• 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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4
Double-Entry Accounting
• Basis of modern financial reporting
• Every financial event recorded in two parts
– Debit and credit entries must balance
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5
Double-Entry Accounting (cont’d.)
• Capital assets: items owned that have a
long useful life and cost more than a
minimal amount
– Examples: land, buildings, furniture, vehicles,
equipment
– Capital asset purchase recorded as credit to
cash and debit to the appropriate account
– Most capital assets are depreciated over time
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6
Double-Entry Accounting (cont’d.)
• Loans
– Money borrowed is a credit to a new liability
account and a debit to cash
– Payments have two components:
• Principal payments posted as debit to liability
account and credit (reduction) to cash
• Interest payments posted as debit to an expense
account and credit (reduction) to cash
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7
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 audited annually
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8
Computerized Accounting Systems
in Healthcare
• Practice Management System (PMS)
– Computer software programs designed for
medical practices
• Electronic medical record (database) with clinical
information on each patient
• Scheduling module
• Billing and insurance claim functions
• Accounting functions
– Can buy “off-the-shelf” or customized system
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9
Computerized Accounting Systems
in Healthcare (cont’d.)
• 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 such as depreciations prepared and
posted at end of accounting period
– Worksheet prepared and used to generate the final
trial balance
– Final trial balance used to prepare financial statement
for accounting period
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10
Computerized Accounting Systems
in Healthcare (cont’d.)
• Procedure for manual accounting (cont’d.):
– Final trial balance used to prepare financial statement
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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11
Computerized Accounting Systems
in Healthcare (cont’d.)
• Procedure for computerized accounting:
– Each transaction entered 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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12
Computerized Accounting Systems
in Healthcare (cont’d.)
• Computerized accounting system pros:
– 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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13
Summary
• Accounting is the language of business
that allows one to understand and interpret
financial statements
• Double entry accounting based on
equation: Assets = Liabilities + Net Worth
• Every accounting entry is self-balancing
with credits equaling debits
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14
Summary (cont’d.)
• Bookkeepers record financial transactions
• Accountants review entries, prepare
financial statements, monitor financial
controls, and provide financial reports and
analyses to management
• Computerized financial management
systems save time and improve accuracy
but need effective management controls
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15
Accounting and the
Financial Management
Process
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Chapter
5
Objectives
• Upon completion of this chapter, you will
be able to:
– Describe the levels of accounting expertise for
various sizes of healthcare facilities
– Differentiate between financial and
managerial accounting
– List the stakeholders in healthcare financing
– Identify generally accepted accounting
principles
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2
Introduction
• Healthcare organization size correlates
with sophistication of accounting and
financial management
– Small practices can get by with a bookkeeper
and a part-time accountant
– Large publicly held healthcare corporations
need bookkeepers, accountants, budget
managers, outside auditors, and risk
managers
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3
Financial Accounting and
Managerial Accounting
• Financial accounting: preparation of
financial documents for external use
– Reports to Medicare and Medicaid
– Reports to stockholders
– Financial statements and budgets of
governmental healthcare agencies
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4
Financial Accounting and
Managerial Accounting
• Managerial accounting: preparation of
financial documents for internal use
– Budget-to-actual expense reports
– Profitability (or loss) forecasts
– Breakeven analyses for new services
• Dual-use reports
– Annual balance sheet and income statements
– Budget documents
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5
Stakeholders in Healthcare
Finance
• Direct financial stakeholders
– Owners, partners, and stockholders
– Bondholders, lenders, and creditors
– Employees and benefactors
• Governance and regulatory stakeholders
– Governing boards
– Governments
• Customers
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6
Generally Accepted Accounting
Principles
• GAAP: standards and rules for recording
financial transactions and reporting
financial information
– Codified by Financial Accounting Standards
Board
– Accepted by American Institute of Certified
Public Accountants
– Even with standards, accounting is more art
than science
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7
Generally Accepted Accounting
Principles (cont’d.)
• Going concern concept
– Assumption is that medical facility will
continue in business (is a going concern)
– Asset and liability values are based on
continued operation
• Assets typically valued at cost
• Liabilities assumed to be fully payable
• If a going concern fails, its value is likely to be far
less than what is on the “books”
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8
Generally Accepted Accounting
Principles (cont’d.)
• Matching
– Accrual accounting standard for businesses
• Revenues posted on date earned
– A medical service provided today gets posted as revenue
today, even when payment is not expected for weeks
• Expenses posted as resources are used
– When a pay period crosses an accounting, the expenses
must be split across the accounting periods
– Depreciation: reducing stated value of an
asset based on its age or number of uses
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9
Generally Accepted Accounting
Principles (cont’d.)
• Consistency
– Accounting methods (such as depreciation
schedules) used consistently over time
• Materiality
– Errors that significantly affect the accuracy of
financial statements must be corrected
– Significance is determined by professional
accountants and auditors
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10
Generally Accepted Accounting
Principles (cont’d.)
• Full disclosure
– Anything that may affect the financial
condition of the business must be disclosed in
the annual financial report
– This includes events that occur between the
end of the fiscal year and the preparation of
the annual report (subsequent events)
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11
Summary
• Financial accounting generates reports
mostly for external use
• Managerial accounting generates reports
mostly for internal use
• Stakeholders in healthcare are all persons,
organizations, and governments impacted
by the healthcare facility
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12
Summary (cont’d.)
• Generally Accepted Accounting Principles
are standards and rules used by
accountants and include:
– Going concern concept
– Matching
– Consistency
– Materiality
– Full disclosure
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13

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