Accounting Principles and Health Care Essay
There are no formal accounting principles that apply to health care. However, there are five generally accepted guiding principles used in the management of the financial aspects of health care management (Cleverly, Song & Cleverly, 2011). Understanding the five guiding principles are important in understanding financial information and managerial accounting and how the principles relate to health care (Cleverly et. al. ). The five principles include, accounting entity, money measurement, duality, cost valuation, and stable monetary unit.
Each principle and how it relates to health care is discussed in the following (Cleverly et. al. ). Accounting Entity An accounting entity is the business or corporation that performs clear economic activities, separate from any personal economic endeavors (Accounting Tools, 2010). An accounting entity requires financial records that define financial activities (Cleverly et. al. ). In health care, accounting entities can be hospitals, clinics, or other entities that are part of a larger corporation.
Accounting is geared to measure and report the financial activities of the entities under consideration. Money Measurement Money Measurement is very simply, a way to keep count and records of the incoming and outgoing revenue of the accounting entity. This is not an easy task and involves consideration of various issues (Cleverly et. al. ). Resources and liabilities have to be considered and calculated to determine accurate money measurement. Resources are also referred to as assets.
Scarce resources are things, supplies, money, and other things or resources that are needed by the company in order to generate money. These resources are limited and necessary to the entities operation (Cleverly et. al. ). This may include nursing staff for heath care organizations. Other scarce resources for health care organizations may include buildings, many different kinds of medical supplies, medications, and other supplies to care for patients and maintain the organization. Assets are the resources that the organization has and the money generated.
Liabilities are resources that are owed for services, supplies and other things that the organization has acquired. The ideal goal of any business is for the assets to be greater than the liabilities (Cleverly et. al. ). Duality Duality is a simple mathematical equation or rather, it seems simple. The equation states, “The value of assets must always equal the combined value of liabilities and residual interest, which we have called net assets. ” (Cleverly et. al. pg. 185 para. 1) This requires balancing reports about changes in either side of the equation.
In health care, for instance, changes such as buying supplies, receiving payment for services, or paying the electric bill are all transactions that require balancing the books, so to speak, so that the equation is still equal. Cost Valuation Cost Valuation can be defined as choosing the right price for services, supplies and other things of value (Hutton, 2005). Choosing the right price may be based on the history of what the entity has paid that is reflected by money measurement or may be based on other measures of what a cost should be (Cleverly et. al. . Market value is a way to assess a cost value.
This seems to be favorite way with many organizations. This method is not considered objective, however and can provide different opinions on what an item is worth, making costing difficult (Cleverly et. al. ). Replacement value is another way of choosing the right price. This gives the cost of how much money it would take to replace an item or service (Cleverly et. al. ). In health care for instance, when costing an expensive piece of medical equipment, replacement value makes more sense than market value.
The organization may receive different quotes on market value but replacement value should be more consistent and reliable. Stable Monetary Unit The stable money unit is our country is the dollar. The dollar is used in money measurement and other principles that have money values attached. The dollar is always the dollar but the value can change based on the economy and inflation (Cleverly et. al. ). An example of how this might impact health care is, suppose the organization, based on replacement value, has allotted a certain amount of money to purchase an expensive medical devise.
Before the purchase has been made, the dollar decreases in value or is unavailable and has to be imported. The value of the dollar has changed; the country from which the item is imported from may have experienced a decrease in the value of the United States Dollar. The dollar is still a stable monetary unit though there may be fluctuations due to inflation or other events.
Conclusion There are no specific hard rules that govern accounting; the five guiding principles of accounting are used to help organizations keep track of the entity’s assets and liabilities. The principles are not perfect but serve as a guide to costing and money measurement. The stable money unit in our country is the dollar. The dollar may experience fluctuations in value but is still considered stable and how the United States measure and pay for any expenses. The five principles seem simple and as one looks into each principle further, it is noted that there are complexities and problems that must remain in the forefront of the accountant’s mind when keeping up with the financial end of any organization.
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