Chart of Accounts and Bookkeeping for Healthcare Industry
Chart of Accounts and Bookkeeping for Healthcare Industry
Just like any other industry, a chart of accounts in healthcare is an essential component of running a business. Healthcare systems and organizations need funds to run their operations efficiently and effectively. And for them to achieve this, healthcare managers need a clear, accurate, and well-organized financial system. It helps them to work well, maintain their excellent facilities, and gain more opportunities for business growth.
Bookkeeping in healthcare is quite complex, so you need a team of expert bookkeepers who will make your tax, payroll, and all of your accounting processes effortless.
The revenue cycle is the backbone of any industry. It includes the healthcare industry, such as hospitals and healthcare facilities. It enables them to keep offering medical treatment to patients. However, they must also pay their bills, fulfill payroll, and enhance their financial performance. It all comes down to having good financial management. That is necessary for the efficient and economic functioning of your practice. In this article, let’s get into the specifics and examine the chart of accounts’ significance in the healthcare sector in more detail.
What is a Chart of Accounts?
An organization’s core ledgers are in a chart of accounts. It summarizes all the different financial transactions a business makes over a specific time. It is an essential component of your company’s accounting system. You can monitor your organization’s cash flow with its assistance. It enables you to retrieve and present crucial financial data while simplifying accounting.
A chart of accounts includes all your company’s assets, liabilities, equity, revenue, and expenses in one sheet. Keeping track and maintaining them up to date is more straightforward when there is a unified source. Without a structured system for keeping records, there is a danger of having incorrect information and data. To make sound financial decisions, you must have the relevant facts. In addition, you can find it challenging to complete necessary chores like financial budgeting without a chart of accounts.
Imagine you’re looking to get long-term financing for your organization and want to know your asset coverage ratio. Then, you can determine if you can pay off your debts with your current assets or whether you need to postpone.Â
Overview of the Healthcare Sector
The healthcare industry is the assimilation and fusion of economic sectors. They offer products and services for the treatment of patients in the curative, preventative, therapeutic, and palliative care categories. These products support preserving and regaining health. The modern healthcare industry relies on interdisciplinary teams to address the needs of populations. These teams include qualified health workers, paramedical staff, and professionals. These teams comprise the three essential services, products, and finance branches.
An organization (like a hospital or clinic) or person (like a doctor, nurse, affiliated healthcare professional, or community health worker) that offers preventive, curative, promotional, rehabilitative, or palliative care treatments to individuals, families, or societies is a healthcare institute.
Healthcare Accounting
Healthcare accounting shares several fundamental characteristics with professional accounting in other sectors. For instance, universal healthcare accountants conduct cash flow analyses. They also maintain financial information and examine report data through financial analysis. The intricate layers of functions are what distinguish healthcare accounting from simple accounting.
These layers stand in for various stakeholders in the healthcare industry, including patients, insurers, healthcare professionals, pharmaceutical firms, and governmental organizations. Each of these subcategories has unique accounting and financial intricacies that occasionally overlap. For instance, tracking payments from patients, services, and insurance companies is a typical aspect of payment management.
Accounting-Healthcare Organization
Accrual and Cash Accounting
An organization can track revenue and costs using the accrual accounting method long before they are collected or paid out. For example, the facility creates the method of producing a transaction that may be a bill for hospitalization or medication. This model will incorporate credits and debits into the system in a care delivery scenario.
This technique enables healthcare facilities to get a more precise image of transactions. That might occur during a specific time, such as a quarter or financial year. Extensive healthcare facilities will adopt this strategy in their accounting practices. Cash accounting is a straightforward and transparent approach that may be adequate in some businesses with less demanding accounting standards. However, this system is typically unsuitable for healthcare facilities because payments can often take months to finish and occasionally never are.
Reporting
Healthcare businesses produce financial documents that prove their financial performance, just like other corporations that adhere to GAAP. Senior management, hospital trustees, and the public are all audiences for these financial statements. Cash flows and balance sheets are only a few examples of the information in these reports. Additionally, tax-exempt hospitals must itemize unpaid community care services like charity care.
Depreciation
Healthcare sectors are the significant users of commercial buildings and industrial goods. All of these items degrade over time. This procedure entails figuring out the asset’s cost and estimated usefulness, just like with depreciation management in other industries. Depreciation expenditure gradually lowers the carrying amount of fixed assets as their value depreciates over time. Its calculations exclude factors like land appreciation.
Receivables and Payments for Medical Services
A medical account receivable refers to the outstanding reimbursement owed to providers for issued treatments and services. Therefore, healthcare providers must stay on top of efforts to collect reimbursement for accounts receivable.
A non-clinical accounts payable clerk handles invoices and bill payments to vendors who fall outside of the medical arena. It includes vendors who supply utilities, food supplies, cleaning supplies, lighting fixtures, parking lot plowing, and other such products and services.
Chart of Accounts of the Healthcare Sector
In the Health sector chart of accounts, there are two primary forms of information. First is the balance sheet, which reports information about the financial situation. The second is the income statement, which reports information about the operating outcomes. The previous is a measurement of a hospital’s assets and liabilities. Whereas the latter is a measurement of a hospital’s income received and the cost incurred. A hospital typically receives income in the form of subscriptions and donations from governments—additional earnings such as patient fees, operating room costs, and fees for specialized care.
Similarly, a hospital’s expenditures include donations to charity, medical benefits, and overhead costs like rent, printing, stationery, surgical equipment, and medicines.
In addition to the already mentioned Balance Sheet and Income Statement, the healthcare sector prepares some unique books to keep a record of distinct accounts. These include maintaining the Subscriptions Record to track the receipt of donations, subscriptions, and other payments.
Balance Sheet
A balance sheet provides a basic overview of an organization’s financial health and a snapshot of its stability, which can help guide future decisions. Therefore, physicians must understand how to track best and assess balance sheets to determine how efficiently their groups use capital and manage risks.
Accounts on a Balance Sheet
Assets
Depending on the type of care and treatment provided, a hospital’s critical assets invariably include patients, medical professionals, support personnel, medical records, equipment, supplies, and pharmaceuticals.
Current Asset
Assets that can easily transform into cash in a single fiscal year or operating cycle are current assets. Current assets have a life of less than a year and support ongoing operational costs and investment.
- Cash in hand
- Cash in Bank
- Accounts receivable
- Inventories
- Prepaid Expenses
- Other funds
Fixed Assets
Long-term or non-current assets include fixed assets. For example, property, plants, and equipment are known as tangible fixed assets because they have a physical component.
- Land (Depreciation)
- Building
- Equipment
- Vehicles (Ambulances)
- Construction in Progress
- Other
Liabilities
A liability is a debt a firm owes that will cause it to forfeit future financial gains from dealing with other people or companies. Liabilities in the healthcare sector are sometimes an alternative to equity to fund the hospital’s operations. Additionally, some liabilities are necessary for day-to-day operations, such as accounts payable or taxes payable.
Current Liabilities
Liabilities with a one-year maturity date are considered current. These mostly take place during routine corporate operations. Current liabilities are crucial as they show the liquidity position of a company and its ability to pay back short-term debts.
- Account payable
- Short Term loan payable
- Income taxes payable
- Accrued Expenses
Long Term Liabilities
Liabilities that are due after more than a year are long-term (non-current) liabilities. Therefore, it is crucial that the short-term obligations, such as interest costs, are not included in the long-term liabilities.
- Building Fund
- Depreciation fund
- Equipment Fund
- Mortgage payable
Equity
Equity is also known as shareholders’ equity or owners’ equity for privately held businesses. In the healthcare sector, shareholder equity is the sum of money invested by the shareholder in return for the dividend. Other components of the equity include retained earnings of the previous year.
- Long-term investment
- Drawing
- Retained Earnings
- Capital Stock
- Treasury Stock
Income Statement
An income statement is also known as a profit and loss statement. It conveys the hospital’s operational outcomes (revenues and expenses), and management needs to dictate its format. Additionally, the statement must include comparison data from the current and prior years.
Incomes of Hospital
- Reductions in Patients’ Income
- Non-Operating Income
- Grants
- Government Donations
Expenses of Hospitals
- Physician salaries
- Nursing Salaries
- Clinical Psychologist salaries
- Administration
- Dietary
- Property and household
- Operation of Plants
- Repair and maintenance
- Motor Service
- Contract Labor
Capital Expenditure
Capital expenditures refer to all expenses incurred for the purchase of fixed assets. Such as land, buildings, furnishings, and equipment to operate the hospital. Even though they are continually in use, their value endures over time. In other words, capital expenditure gives a long-term advantage to a company.
Revenue Expenditure
All costs incurred to operate the hospital, such as salaries, supplies, maintenance, repairs, taxes, insurance, etc., are revenue expenditures. These expenditures comply with the accrual method or cash accounting practice. The Income and Expenditure Account finally records these expenses to determine the profit or loss for the specific period.
- Fees – Patients
- Fees – consultation
- Refunds
Adjustments in the Chart of Accounts
Specific adjustments before ascertaining the result of the operation, e.g., grants from the government, collection on patients’ accounts written-off, writing-off depreciation, advance deposits received from indoor patients, prepaid expenses, deferred incomes, etc.
Revenue Cycle Management Optimization
The role of revenue cycle management provides the clearest explanation of the significance and necessity of accounting in the healthcare industry. Without funding, no hospital—profit or nonprofit—can remain operational. Only a few crucial tasks are necessary to achieve larger savings, optimize accounts receivables administration, and expedite claims approvals, which aid medical facilities in successfully running their operations and procedures.
Healthcare accounting steps in to help doctors handle the patients’ claims, payments, bills, expenses, income, cash flow, tax requirements, and budget needs. Without a structured and coordinated healthcare accounting standard and procedures, the likelihood of mistakes and inaccuracies in bookkeeping and financial reporting increases.
Medical Cost Control
Most healthcare services generally affect medical cost trends to improve and better manage health and wellness. They concentrate on boosting effectiveness in administrative tasks (like revenue cycle management). From the perspective of health insurance, cost-effectiveness is also essential. They ensure that the doctors adhere to their recommendations for cost-effective medical tests. Here, the accounting division’s function assumes a key role. The accurate budgeting, reporting, and analysis provided by a strong healthcare accounting system make informed decisions.
Importance Of Proper Chart Of Accounts
Due to subpar medical accounting services, the hospital’s revenue cycle management can become a mess. Such errors might cause expensive delays in the medical facility’s ability to generate money, which is necessary to cover its expenses. In the healthcare sector, proper and timely bookkeeping and accounting are crucial. It helps in leaving a trail of breadcrumbs for each payment received or anticipated to be received frequently. The only people who could keep up with your bookkeeping while you’re on the go would be a qualified and skilled accounting team.
Final Thoughts
In conclusion, healthcare facilities’ accounting departments follow a structure and methodology most similar to commercial businesses. The importance of a chart of accounts in the healthcare sector is paramount to achieving financial performance targets and ensuring viability. Medical professionals must guarantee accurate and efficient healthcare accounting systems and office operations for profitability. Doctors managing small healthcare facilities or clinics should effectively oversee their workforce, including the accounting team.
This is where Oak Business Consultant steps in. Our accounting and bookkeeping services are tailored to meet the unique needs of the healthcare industry. A chart of accounts aids you by saving time and managing your healthcare operations efficiently. With our expertise, we assist you in lowering operational expenses and optimizing financial performance, ensuring your focus remains on patient care. Don’t let the complexities of healthcare accounting hinder your facility’s success. Contact Oak Business Consultant today and take the first step towards streamlined financial management in your healthcare practice.
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