GAAP Generally Accepted Accounting Principles in Health Care

GAAP (generally accepted accounting principles) in health care

Within the United States, all businesses that keep financial records must adhere to GAAP or generally accepted accounting principles, including both for-profit and not-for-profit healthcare entities. "GAAP is not a single accounting rule, but rather the aggregate of many rules on how to account for various transactions" (Kramer & Applebaum 2013). The first two principles of GAAP are that "financial records must be separately maintained for each economic entity" in a separate fashion and that "an economic entity's accounting records include only quantifiable transactions. Certain economic events that affect a company, such as hiring a new chief executive officer or introducing a new product, cannot be easily quantified in monetary units and, therefore, do not appear in the company's accounting records" (GAAP, 2013, Houghton Mifflin Harcourt). These details may be included as qualitative data and, in fact, may be necessary to insert as footnotes to reports to investors to give a full financial picture of the entities' future financial health. Finally, all entities, regardless of industry type, are recorded according to the going concern principle, which suggests that there is an assumption that the entity will exist indefinitely (GAAP, 2013, Houghton Mifflin Harcourt).

Unique challenges of healthcare accounting

Some unique characteristics of financial reporting in healthcare may be manifested, however, when creating a report compliant with GAAP. For example,...

"Making matters more complicated, many payments are subject to billing reviews, retroactive adjustments or other queries which may occur over a considerable period of time," even months or years (Kramer & Applebaum 2013). Thus, healthcare organizations must make estimates "in order to record revenue and related patient receivables in the financial statements. The basis for such estimates may range from relatively straightforward calculations to highly complex judgments based upon assumptions about future events and decisions" (Kramer & Applebaum 2013).
This may seem to flout some of the basic principles of GAAP which include the revenue recognition principle that "revenue is earned and recognized upon product delivery or service completion, without regard to the timing of cash flow" and the matching principle that "the costs of doing business are recorded in the same period as the revenue they help to generate" but it is an inevitable necessity, given the economic structure of the healthcare environment (GAAP, 2013, Houghton Mifflin Harcourt). There is also the cost principle which suggests that assets are entered at the cost the extract at the time of the exchange, even if they appreciate and are later affected by other financial, technological and environmental pressures. Although changes will be coming to the industry with the new healthcare law, the payment insurance 'gap' (as opposed to GAAP) will continue. GAAP reflects accrual basis accounting vs. cost…