The current business market is highly complex and it is only by following effective practices of recording business information in a way that is generally agreed upon that a firm can be able to survive. Conformity in preparing financial information should be adhered to and norms followed. The following are details of each principle and their relation to health care:-
This principle holds that revenue should be recognized when the transaction is complete and not when it is earned. However, the principle does not basically mean that revenue will not be recognized until the time that the transaction is barely complete. There are periodic transactions that take place in the process of a given project that are recorded as they are earned until the last time that the whole project is complete. Most healthcare facilities recognize revenue whenever a service is offered to the patients irrespective of the ability of the patient to meet such medication expenses at such a time that they are recognized. This, however, has negative results since not all revenue recognized can be actually earned since some of it turn out to be bad debts that are not collectable at all. This may cause financial problems ranging from one health care facility to another (Lapsley, 2001). Revenue is commonly recognized on accrual basis be it in health care facilities or in other business entities irrespective of the ability to collect that revenue item or not.
This principle argues that information that may influence understanding of a company’s financial statement should be clearly stated when reporting the financial reports. Information that does not affect ledgers directly should be stated in the form of foot notes at the end of the reporting. This principle goes hand in hand with materiality principle that states that only material information should be disclosed when reporting financial information. Health care centers that recognize significant amount of revenue from patients should give full disclosures about provisions for bad debts and doubtful debts in addition to the sources from which such revenue is earned. When evaluating the receivables, the firm should clearly analyze its past trend so as to provide information that guides in setting provision allocation for doubtful accounts (Mulford & Comiskey, 2002). Full disclosure should also be made for the main revenue earning facilities and services for health care entities so that the stakeholders can improve on offering them to maximize revenue. Additional information outlining revenue that comes from patients that do not depend on insurance and third party payers should also be clearly stated.
Any firm that operates is assumed to operate to a foreseeable future and that intention to cease its operations is not stated unless the organization is formed for fixed period of time for which when the period elapses the business ends. In the same way health care facilities are believed to be formed to provide services for foreseeable future.
This principle holds that operations of a given firm should be conducted in a manner that promotes equity and reasonableness for any actions acted upon. The persons involved in accounting and recording of financial information should do so in a manner that is fair and reasonable so that they do not mislead the organization. They should provide information which is reasonable so that when they give opinions they do not understate or overstate but do it as reasonably expected. Information about provisions for doubtful debts should be stated based on the knowledge of the patient’s ability to pay and not on financial controller’s perception. They should raise reasonable doubtful debts in the books of account and not exaggerate them.
The information that is provided and recorded in the books of account should be factual and not based on personal feelings so that different people looking at the statements would arrive at the same conclusion easily. The original documents should help in feeding in information to the final statements being made and should be kept for use by persons concerned. In health care organizations, objectivity principle may not be fully attained since some accounting practice would require the opinion of the financial controllers, i.e. they may recognize revenue at the time that it is earned instead of the time that it is actually received hence raising unnecessary provisions for bad and doubtful debts. For example, both internal and external auditors should have same opinion on presentation of financial information based on objectivity principle.
Matching principle argues that expenditures incurred in order to gain some earning in the form of revenue should be recorded during the period for which it is earned so that they are treated in their true periods when making final financial statements. For instance, if payment for outsourced services is made, such payment should be related to the period for which the service relates.
This principle states that a business is an independent entity from its owners and acts done by the owners in for their own benefit is charged on them independently and not charged on the firm. The financial statements of the business should reflect items of the firm alone and not mix them with other firms or with items of the owner so that expenditure on health care facility is charged on the firm and individual expenditure charged on the owner alone.
Lapsley, I. (2001). Accounting, modernity and health care policy. Financial Accountability & Management, 17(4), 331-350.
Mulford, C. & Comiskey, E. (2002). The financial number game: detecting creative accounting practices. New York: John Wiley & Sons.