Accrual and Cash Accounting Concepts in a Hospital
Difference between Accrual and Cash Accounting Methods
Accrual and cash accounting methods are two approaches used to recognize revenues and expenses. Under the accrual basis, the revenues are recognized when it is earned and realized or realizable. Thus, an enterprise can claim to have earned revenue from a certain transaction if it has delivered the products or provided the services. The term “realized” means that cash is received, and “realizable” signifies that there is a reasonable basis to anticipate that cash will be received in the future. On the other hand, expenses are recognized in the same period that related revenues are recognized, a practice referred to as matching principle (Bierman, 2010). Thus, accrual basis of accounting matches revenue earned with expenses incurred to earn that revenue regardless of when the cash will be received or paid.
Conversely, cash basis of accounting recognizes revenue when cash is received and expense when it is paid. The cash method is only appropriate for small businesses and personal finances, and it is not common among large companies because it fails to recognize credit sales, which form a significant part of total sales (Bierman, 2010). For example, when a hospital offers health services at a cost of $5,000 to an insured patient, it cannot recognize the revenue under the cash basis until the insurance company pays the amount. However, under the accrual method, the revenue is recognized and recorded in the company's books, even if it shall not have been received at the end of the financial year. Therefore, cash method is only appropriate when the enterprise is dealing with cash sales only as well as pays for its expenses on a cash basis. Today, there are very few businesses using the cash basis of accounting because it has become difficult to pay cash for all the expenses for many entities. Accrual basis is the most common method of recognizing revenues and expenses and International Accounting Standards Board encourage businesses to use it in preparing their financial statements as it shows the correct business performance and position.
Medicines as Part of Balance Sheet
On a daily basis, I provide medicines to different patients who come to the hospital to seek medical services. As a nurse, I am responsible for administering drugs prescribed by the doctors. I get the drugs from the hospital pharmacy where they are stored. The hospital buys drugs in bulk to take advantage of volume discounts offered by manufacturers and suppliers. The value of the drugs that is in the store on the last day of a financial year is taken to the balance sheet as a current asset. The value can be arrived at by conducting a stock take exercise or through calculation by adding the opening stock at the beginning of the year to the purchases during the year, and then subtracting medicines used during the year (Gapenski, 2012). Many companies use both methods to increase the accuracy and reliabikity of the figure reported in the balance sheet.
Impact of Cash Flow
Cash is crucial for a hospital as it ensures that expenses and bills are paid on time. It can be very disastrous if the hospital failed to pay its water or electricity and these services are interrupted. Cash is needed to pay loans and other debt obligations, and lateness in payment can have a negative impact as fines and penalties are charged for delayed payments, as well as affect the hospital’s credit ratings (Tracy & Tracy, 2011). Furthermore, unpredictable cash flow may deny the hospital an ability to take advantage of investment opportunities that may arise. For example, the hospital cannot acquire another clinic in a potentially prime location.
References
Bierman, H. (2010). An introduction to accounting and managerial finance: a merger of equals. Singapore: World Scientific.
Gapenski, L. C. (2012). Healthcare finance: an introduction to accounting and financial management. Chicago: Health Administration Press.
Tracy, T. & Tracy, J. (2011). Cash flow for dummies. New York: John Wiley & Sons.
