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Generally Accepted Accounting Principles in Healthcare
April Dierickx
HSC/571
June 10, 2013
Tamica Lewis

Generally Accepted Accounting Principles in Healthcare
Generally Accepted Accounting Principles (GAAP) are the accounting standards used in the United States that provide an outlet for organization to record and report their financial information in a standardized manner (Richards, n.d.). This has proven to be of particular importance in the healthcare arena where many areas of finances can be ambiguous or gray. Additionally, the principles guide the reporting systems to prove or disprove the financial viability of the organization. This again is important in the healthcare industry related to achieving the goal of providing quality care to patients (Cleverly, Song, & Cleverly, 2011).
GAAP focuses on five different principles of accounting. Accounting entity, money measurement, duality, cost valuation, and stable monetary unit are the five principles discussed in the following paragraphs. Principle definition and the relationship they have to the healthcare industry will be identified and correlated to healthcare practices.
Accounting Entity
Cleverly, Song, & Cleverly (2011), define an accounting entity as the organization for which financial statements are being formed. They discuss the difference between entities such as sole proprietorship, incorporations, and affiliations with government agencies and universities. The clear definition does not include employees or other persons or organizations with vested interest in the organization but solely the organization’s financial transactions (Cleverly, Song, & Cleverly, 2011).
An example of a healthcare entity may be James A. Haley Medical Center in Tampa, Florida. Although the hospital is associated with a university and operated by the federal government, it is still considered its own financial entity. Additionally, the campus houses a domivillary and a nursing home which is included in its accounting entity.
Money Measurement
Cleverly, Song, & Cleverly (2011), describe money measurement as the evaluation of economic resources and liabilities and the effect of the changing levels on the institution. They describe economic resources as the means and supplies necessary for economic activity. Health care institutions have buildings, equipment, supplies and receivables that comprise their economic resources.
Liabilities are defined as economic obligations (Cleverly, Song, & Cleverly, 2011). These obligations are transferred as resources or services to gain resources from other entities. In healthcare organizations, liabilities may present as loans, financed purchases, or any other types of financial obligation owed by the healthcare organization.
Duality
Duality is described as the simple arithmetic of assets and liabilities revealing the net assets (Cleverly, Song, & Cleverly, 2011). This principle clearly identifies the relationship of assets and liabilities and the result of net assets. Financial assets must always equal the combined value of liabilities which yield net assets (Cleverly, Song, & Cleverly, 2011).
Cleverly, Song, & Cleverly (2011), describe the changing environment of organizations and title the changes as transactions. Transactions affect the liabilities and assets of the organization and result in the growth of both. In a healthcare setting, these transactions could be the acquisition of new equipment, structural or building purchases, or the purchases of supplies that yield additional billable services or goods.

Cost Valuation
Cost valuation as described by Cleverly, Song, & Cleverly (2011), may not be the exact value of assets of the organization if the organization were to liquidate. Cost valuation takes into consideration market value and replacement cost valuation. Financial institutions are particularly interested in an organization’s market value of assets. This information is often used in a decision making process to determine the worthiness of the organization (Cleverly, Song, & Cleverly, 2011). Alternatively, replacement cost valuation is an excellent tool, especially in healthcare institutions, used in determining the delivery of services based on the cost of the resources. The replacement cost must be considered when planning for additional service delivery as the cost of the resources will no longer be the same as it was at the inception of the service delivery.
Stable Monetary Unit
The stable monetary unit principle prevents monetary units from being adjustable. According to Cleverly, Song, & Cleverly (2011), the dollar today is considered as having the same monetary power as the dollar did in 1980. The principle does not allow for the adjustment of inflation to be considered when reporting organizational finances. In the healthcare industry, if this principle were not applied, a gross discrepancy among income and cash flow could exist resulting in the demise of the organization.
Conclusion
Healthcare institutions as well as any other organization are viable or unsuccessful based on the balance of assets and liabilities. The GAAP model provides a structured, streamline approach to financial accounting and provides a method for the evaluation of a healthcare organization’s financial success.
References
Cleverly, W. O., Song, P. H., & Cleverly, J. O. (2011). Essentials of health care finance (7th ed.). Sudbury, MA: Jones and Bartlett Learning.
Richards, J. (n.d.). How does GAAP aid in healthcare?. Houston Chronicle. Retrieved from http://smallbusiness.chron.com/gaap-aid-health-care-36841.html

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