Health care finance overview and key principles

Health Care Finance

Assets and Liabilities

Assets and liabilities are found in a balance sheet. Baker and Baker (2011, p. 107) define a balance sheet as a record of "what an organization owns, what it owes, and basically, what it is worth."

Item

Asset

Liability

Cash

Inventory

Bonds payable

Buildings

Payroll taxes due

Accounts payable

Equipment

Notes receivable

Assets, in basic terms, are all those items that an entity owns. In essence, an asset should have some value attributable to it. Current assets, according to Shim and Siegel (2000, p. 25), "are assets expected to be converted into cash or used up within one year or the normal operating cycle of the business, whichever is greater." They include such items as cash and stock. Long-term assets, on the other hand, include all those assets or items an entity does not intend to consume within a single year. Examples include, but they are not limited to, motor vehicles and buildings.

Liabilities could be defined as the obligations and legal debts an entity owes to outsiders such as suppliers. Long-term liabilities, in the words of Shim and Siegel (2000, p. 25), "have a maturity of greater than one year." They, therefore, include such items as mortgage payable and bonds payable. Current liabilities, on the other hand, have a maturity of less than one financial year. Examples, in this case, include accounts payables and short-term debt.

Essentially, with regard to the impact of assets and liabilities on a health care organization's finance, current assets are representative of the resources an organization has available for patient care services within a single financial year. Questions that should, therefore, arise herein are: does the organization have sufficient funds to settle its bills? Have restricted funds been protected? Liabilities could be of great benefit in the determination of whether payments being made to vendors are timely, whether the entity is strategically making use of its line of credit, whether the plan to repay any obligations owed to outsiders is sound, etc. Computing the ratio of current assets to current liabilities could enable an organization to determine or gauge its ability to meet its obligations (short-term).