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Generally Accepted Accounting Principles

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Generally Accepted Accounting Principles

Introduction
In the past, the financial statements of health care organizations’ were fairly easy to compare. Historically, members of the healthcare community had applied similar sets of accounting rules without regard to their business structure. This meant that whether an organization was a for-profit, nonprofit, or a government owned, every healthcare entity was considered to be in the same industry and the accounting procedures they were forced to follow were similar, thus increasing the level of comparability between organizations. However, today’s standard setting environment requires these similar organizations to apply different sets of accounting standards based of their business model. Resulting in similar transactions being accounted for differently and reducing the level of comparability between financial statements. This has led to the need and implementations of Generally Accepted Accounting Principles.
Generally Accepted Accounting Principles, or GAAP, are a framework of accounting standards, rules and procedures defined by the professional accounting industry, which have been adopted by nearly all publicly traded companies in the United States, and allow for the recording and reporting of financial information in a uniform manner (Investing Answers, 2015). The benefit to companies using GAAP is that it makes it easier to compare the financial statements of different companies. GAAP aids in health care to establish the creditworthiness of the business or organization and earn a rating of financial strength.
Several organizations have been instrumental in establishing generally accepted accounting principles for health care businesses. GAAP for healthcare have evolved from the efforts of organizations various healthcare organizations. The Health Care Financial Management Association (HFMA), the American Hospital Association (AHA) and the American Institute of Certified Public Accountants (AICPA), the Financial Accounting Standards Board (FASB), and the Governmental Accounting Standards Board (GASB) have greatly influenced health care GAAP through the issuance of various accounting standards (Wilder & Mauldin, 1999).
The sources that govern the GAAP used by health care organizations are dependent on the type and structure of their business model. For example, for-profit health care organizations are required to follow the Financial Accounting Standards Board’s standards which govern the financial reporting of for-profit businesses. Nongovernment, nonprofit healthcare organizations are also subject to different FASB guidance that is aimed specifically at nonprofit businesses. In Contrast to the previous discussed business models, GASB maintains the standard setting jurisdiction over government funded health care organizations. Regardless of the business structure, the AICPA has developed an accounting and audit guide that applies to all business oriented health care organizations. The AICPA provides business professionals with an audit guide that incorporates relevant requirements from FASB, GASB and other sources. The declarations issued by FASB and GASB declarations are categorized as Category A GAAP, while the audit guidelines produced by AICPA are considered Category B GAAP. This means that organizations must follow the guideline provided by Category A GAAP first; however if the event or transaction is not covered by a Category A GAAP is permissible for the organization to utilize Category B guidelines.
Purposes of using GAAP in Healthcare
There are several purposes behind healthcare entities employing GAAP when reporting their financial transactions. These purposes included demonstrating financial stability, establishing credit worthiness, reporting their assets and liabilities, and creating bargaining power.
Financial Stability
The use of GAAP allows healthcare entities to demonstrate their financial stability. Under GAAP, businesses use the accrual method of accounting, meaning that revenues are recognized on the income statement when they are earned rather than when the cash is received. This allows companies to report revenue for accounts that are still outstanding. This allows a company the ability to show an acquisition or money that is guaranteed but not yet received, such as a government grant or corporate capital investments. This establishes a higher net worth for the organization than if a cash accounting method were used since that would only include actually assets on hand.
Credit Worthiness
The use of GAAP also helps healthcare entities establish their credit worthiness with third party payers. GAAP rules allow insurance agencies and financial institutions to compare the healthcare business to other businesses in the industry and determine credit worthiness. This is because GAAP records include future revenue, such as payments from insurance companies and government-funded medical insurance.
Assets and Liabilities
The use of GAAP allows healthcare entities to demonstrate to disclose all assets and still account for depreciation. The liabilities are listed in specific locations on the financial statement allowing mangers to recognize what areas of operation and not cost effect and need to be address or discontinued. This method also allows the nonprofit organizations to report pledges from donors and donations already received for comparison.
Bargaining Power
The use of GAAP allows smaller organizations to create bargaining power. Since it is common for businesses to merge or for corporations to take over smaller businesses it is important that each healthcare entity can demonstrate their financial strength. Through the use of GAAP an organization can provide their long-term cash on hand operating budget, which will provide them bargaining leverage in the event of a merger or takeover. The health company that can show their strength through financial reporting maybe in a position to retain management and employees or continue special services offered to their patients.
Conclusion
These are just a few of the ways that using Generally Accepted Accounting Principles benefits healthcare organizations and simplifies both the report of and the comparison between financial statements of these before mentioned entities.

References
Investing Answers. (2015). Generally Accepted Accounting Principles (GAAP). Retrieve from http://www.investinganswers.com/financial-dictionary/financial-statement- analysis/generally-accepted-accounting-principles-gaap-992
Richards, J. (2015). How Does a GAAP Aid in Health Care? Retrieved from http://smallbusiness.chron.com/gaap-aid-health-care-36841.html
Wilder, W.M & Mauldin, D.S. (1999). The Multiple Sources of GAAP for Health Care Organizations: Current and Future. Retrieved from https://www.questia.com/library/journal/1P3-44508835/the-multiple-sources-of-gaap-for- health-care-organizations

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