Generally Accepted Accounting Principles Paper

The term “generally accepted accounting principles” (GAAP) has a specific meaning for accountants and auditors, established by the Federal Accounting Standards Advisory Board (FASAB) in October 1999. According to the FASAB which is responsible for identifying the “GAAP hierarchy” for federal reporting entities. “The GAAP hierarchy consists of the sources of accounting principles used in the preparation of financial statements of federal reporting entities that are presented in conformity with GAAP and the framework for selecting those principles. The hierarchy lists the priority sequence of sources that an entity should look to for accounting and reporting guidance; this language is used in the business of health care (fasab, 2011).”
The five principles of accounting include accounting entity, money measurement, duality, cost valuation, and stable monetary unit (Cleverly, Song, & Cleverly, 2011). This paper will include a brief description of each principle with the intention behind the principle and relate each principle to health care.
Accounting Entity According to Cleverly, Song, and Cleverly (2011) the accounting entity is an organization for which financial information is recorded and reported. In health care, accounting entities may include surgical centers, hospitals, clinics, or others that are part of a larger corporation. Problems may occur when accounting entities differ. An example of accounting entity is a physician who may own a surgical center; that center and personal resources operate using different entities. The entity needs to be clearly defined or the information may be useless or misleading (Cleverly, et. al.2011).
Money Measurement As stated by Accounting Tools, the money measurement concept states “a business should only record an accounting transaction if it can be expressed in terms of money.” Quantitative information rather than qualitative information should be the focus of the accounting transactions. A number of items are never reflected in an organization’s accounting records, and this means they never appear in financial statements. Examples of items that cannot be recorded in terms of money are employee skill level and working conditions, to name a few. Unacceptable working conditions and poor skill levels lead to decrease in retention of employees or disgruntled clients. Each of these can impact the financial results of a business to reflect on revenues, expenses, assets, or liabilities. According to Accounting Tools, “money measurement can lead to issuance of financial statements that may not adequately represent the future upside of a business.” (Accounting tools, 2012).
Duality
Duality is simple arithmetic: “value of assets must always equal the combined value of liabilities and residual interest, which we have called net assets (Cleverly, et. al. p.185 para1).” This means that the balance sheet will always balance. Transactions include purchasing supplies and service payments, and paying bills will affect values of assets, liabilities, or net assets. Accounts can be established to organize the transactions within the health care organization. The key to the duality principle is it keeps the balance (Cleverly, et. al. 2011).
Cost Valuation Cost valuation is the principle used to compare assets and liabilities as market values and replacement cost valuation. On a balance sheet assets and liabilities are reported as historical and acquisition cost. Cost valuation is utilized to examine and clarify the real worth. Market value is a way to assess a cost value; this method is not objective and has varied opinions on what the object is worth. Replacement value determines what it would take to replace a service or item (Cleverly, et. al. 2011). In a health care setting, to cost out an expensive piece of medical equipment, market value will represent different quotes and replacement cost will be reliable and consistent.
Stable Monetary Unit The stable monetary unit is the dollar in the United States. This concept essentially allows accountants to disregard the effect of inflation. This can be a problematic if the country experiences either quick deflation or inflation of currency. A hospital for example, set aside money to purchase equipment based on the replacement value and the value of the dollar decreases before the purchase. In the accounting records it appears to be more expensive, however, the difference is due the decrease of the value of the dollar (Cleverly, et. al. 2011).
Conclusion
In health care, the primary goal is to provide quality care, so the principles are helpful tools for health care to track entity’s assets and liabilities. Another aspect in the importance of accounting is that the practice should remain the same from year to year. In the health care industry there is not a “cut and dried” set of rules in relation to accounting. The five principles detailed in the paper ensure organizations are consistent with reporting measures.