Accounting Fundamentals for Health Care Management Term Paper

Accounting Fundamentals for Healthcare Management

This paper examines governmental and nonprofit accounting and discusses how it differs from commercial accounting. In the accounting field, there may not always be a clear distinction between the three types of organizations. The dividing line between business and nonbusiness organizations may depend on the incidence and relative importance of the nonbusiness characteristics found in an entity. The funds of such organizations are usually earmarked for specific purposes and must be used in accordance with laws, regulations, or contractual requirements.

One distinction of nonbusiness organizations is that they generally have no single indicator of performance, such as profit or net income. FASB:CS-4 provides two performance indicators for financial reporting for nonbusiness organizations:

They provide information about the nature and relationship between inflows and outflows of resources.

They provide information about service efforts and accomplishments.

FASB: CS-4 also sets forth the distinctive features of the nonbusiness organization:

Nonbusiness organizations receive significant amounts of resources from providers who have no expectation of receiving either repayment or economic benefits proportionate to resources provided.

Their primary operating purposes are other than providing goods or services at a profit or profit equivalent.

They have no defined ownership interests that can be sold, transferred, or redeemed, or that convey entitlement to a share of a residual distribution of resources in the event of the organization's liquidation.

The performance of nonbusiness organizations is usually not subject to direct competition in markets as is the performance of business enterprises. (Siegel & Shim, 2006).

The objectives that FASB: CS-4 identifies apply to general purpose financial statements issued by nonbusiness organizations. The objectives are intended to satisfy the needs of external users who generally cannot prescribe the information they want an organization to provide. Therefore, the objective of financial reporting is accountability to the public rather than investors. As a result, the accounting equation associated with nonprofit accounting is:

Assets = Accountability

Accounting systems for nonprofit organizations must provide financial data to internal management for use in planning and controlling operations and to external parties, such as taxpayers and contributors, for use in determining operational effectiveness. The systems should include mechanisms to ensure that management observes restrictions imposed upon it by law, charter, or bylaws. Systems should also provide for financial statements to taxpayers, members, donors, and contributors that such restrictions have been satisfied. For these reasons a nonbusiness organization typically applies the concept of fund accounting along with a budget and appropriations method; they also apply encumbrance accounting to account for the assets and revenues that the organization receives, and to ensure that expenditures are made only for authorized purposes.

Encumbrance accounting is used in most governmental funds in order to prevent over expenditure and to demonstrate compliance with legal requirements. Encumbrances are monies that have been set aside for specific future purposes. Encumbrances are unique to governmental operations and have no counterpart in commercial accounting.

Governmental Accounting

Governmental accounting is based on the features of governmental entities, which differ from other nonprofit and nonbusiness organizations in many ways. Governmental entities are established to render services to a group of constituents. Their principal source of revenue is taxes levied upon their constituents. Also, governmental entities generally operate under very detailed and specific legal restrictions as to the sources and financial resources they may use, as well as amounts they may raise from each source, and the uses they may make of the proceeds from each source. Governmental entities also have the responsibility of demonstrating good stewardship over financial resources provided and entrusted to them by the citizenry.

Fund accounting is the most distinctive feature of governmental accounting. The use of fund accounting allows for proper accounting controls and for demonstrating compliance. A fund is defined as an independent accounting entity with a self-balancing set…