Week 2 Lecture 1.html

Recognizing Income

Accrual refers to when an income is recognized. There are two methods of recognizing income. The first is cash, in which income is only recognized when the organization actually receives money. The other method is to recognize income when a service is performed, creating an obligation on another person to pay, thus creating an accounts receivable. The organization does not yet have the money, but it has accrued an obligation on the part of another to pay at a future date. In healthcare, an obligation to pay is created when a patient is treated, but the money is received when the patient, or more often a third party, actually pays the bill. The second method is fraught with some perils in that the person may never pay, creating a write-off. It is quite common for a healthcare organization (HCO) to use the second method of accrual and have a very large accounts receivable. Some of that is mandated by the use of third-party payers, such as Medicare or Blue Cross, who pay when bills are submitted if all other terms are met. GAAP is a common set of accounting standards and procedures that companies use to compile the financial statements such as valid balance sheet, income statement, and cash flow statement. A major purpose of using the standards is to be able to compare different organizations, that is, to compare apples with apples rather than apples with oranges. Without common standards, it is not possible to know for sure where an organization stands financially vis-a-vis others in the industry. You are not expected to know GAAP standards, but you should be aware of their intent and purpose.

 In this lecture you have learned about the statements designed to provide pertinent financial information about an organization to its managers and to the public at large. Two significant sources of differences between gross and net revenue are charity care and bad debt. They have the same financial but different social effects. Charity care, although expensive, is a positive in that the organization has taken care of a person in need without expectation of payment and accrues goodwill for this service. Bad debt, on the other hand, occurs when an organization expects but does not receive payment for a service. These clients are often turned over to a collection agency, which might be seen to be a negative social event. While both charity care and bad debt are normal in the course of business, remember that there is a social value involved, especially for nonprofit businesses that can take advantage of social gains.