Healthcare Finance w3q
The practice of reporting financial information as a function in today’s operation of a medical practice is particularly important due to intense demands for fiscal acuity. Therefore, it’s important to understand the difference between cash and accrual accounting.
What is the difference between cash-basis accounting and accrual accounting? Why select one and not the other? How does each method affect the financial statements?
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Sample Answer
Healthcare Finance
Healthcare financial management plays a significant role in the success of a healthcare organization. It involves various basic activities that aim to manage the financial resources of a healthcare organization and risks to allow it to achieve its financial and overall goals. One of the healthcare financial management includes financial reporting. This is an accounting activity that involves the utilization of financial statements to present a healthcare organization’s financial details and performance throughout a specific duration, normally a yearly or quarterly basis (Klinefelter et al., 2017). Effective financial reporting in healthcare organizations helps save money by identifying and avoiding unnecessary costs, keeping treatment costs low, and enhancing financial planning. Therefore, it is essential to understand the various financial accounting concepts such as cash and accrual accounting to achieve effective financial reporting.
Cash and accrual accounting are methods applied in recording accounting transactions. The two accounting concepts differ in various ways. One of the differences is that cash accounting is a form of financial accounting where income made or expense incurred in a company is recorded when during cash inflow or outflow. Thus, it recognizes the cash earned in an organization only when received and the expense when paid, not a moment before (Klinefelter et al., 2017). This is contrary to accrual accounting. In this financial accounting method, income is documented when it is generated and not the period it is received while costs are recorded bills are received. Thus, this accounting method does not recognize the period when revenue is received or the expense is paid (Klinefelter et al., 2017). Secondly, the cash accounting system follows the single entry system. This accounting method documents either inflow or outflow of money only. On the other hand, the accrual accounting system employs the double-entry approach. In this method every transaction recorded has two equal opposite outcomes in the form of debit and credit (Klinefelter et al., 2017).
Organizations select cash basis accounting over the other method because it is a simple method to account for transactions. It only accounts for cash paid or received and no complex accounting transactions like accruals and deferrals involved. The accrual basis accounting method can be more complicated since it entails accounting for unearned revenue and prepaid expenses. On the other hand, some organizations select the accrual accounting method over the other accounting for various reasons. One of them is for auditing purposes. It is only financial statements prepared in accrual basis which are applied in auditing (Taborda & Sousa, 2020). In contrast, financial statements prepared using the cash accounting method cannot be audited. The second reason is that the accrual basis of accounting is more correct compared to the other accounting method. This is because the financial outcomes of a company under the accrual basis have a high probability to match revenues and expenses reported, generating a more accurate picture of a company’s long-term profitability. Thus, accrual accounting is suitable for large-scale companies, which need to do auditing, taxation, and handle complex transactions (Taborda & Sousa, 2020). The other accounting is for small businesses because it is simple to track cash flow.
The accounting methods affect income statements differently. According to Klinefelter, (2017), income statements prepared under the cash accounting method, they will show relatively lower-income, while those under the accrual basis show higher income levels.
