Professional Documents
Culture Documents
A. Balance Sheet
B. Income Statement
A. Recording Transactions
B. Chart of Accounts
C. General Ledger
V. Balance Sheet
A. Assets
B. Liabilities
C. Equity
A. Revenue
B. Expense
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A. Sources
B. Uses
A. Cash
B. Modified Cash
C. Accrual
C. Inventory Turnover
D. Current Ratio
E. Quick Ratio
K. Contribution Margin
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XI. Payroll
A. Employer Taxes
1. Federal Unemployment
2. State Unemployment
B. Employer/Employee Taxes
1. Medicare Tax
C. Workers‟ Compensation
A. Elements of a System
B. Management of Responsibilities
C. Procedures
D. Checklist
A. Basis of Calculations
B. Important Measures
C. Other Bases
D. Benchmarking
A. RUUs
B. Costs
C. Payor Contracts
A. Purposes
B. Type Costs
C. Costing Methods
D. Break-Even Analysis
XVII. Budgeting
A. Benefits
B. Components
C. New Services
XVIII. Financing
A. Operating Costs
A. Sole Proprietor
B. Partnership
C. Limited Partnership
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D. Corporation
XX. Definitions:
Accounting
Accounts Payable
Accounts Receivable
Accrued Liabilities
Amortization
Assets
Balance Sheet
Capital Leases
Capitalization
Capitation
Cash-Basis Accounting
Chart of Accounts
Common Stock
Contractural Write-Offs
Corporation
Current Assets
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Current Liabilities
Deferred Revenue
Deficit
Depreciation
Donated Capital
Financial Accounting
Goodwill
Gross Charges
Income Statement
Intangible Assets
Intercompany Receivables
Interest Expense
Interest Income
Liabilities
Long-Term Liabilities
Managerial Accounting
Net Assets
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Nonoperating Revenues
Occupancy Expense
Operating Expenses
Organizational Costs
Owners‟ Equity
Partnership
Patient Refunds
Preferred Stock
Prepaid Expenses
Professional Corporation
Retained Earnings
Revenues
Stockholders‟ Equity
Surplus
Treasury Stock
Undistributed Earnings
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Valuation Allowance
Withhold
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The presentation of reports for use by persons outside a company (bank, investors). The
need for some degree of uniformity requires that these reports are more standardized than
those used in managerial accounting principles (GAAP). GAAP is developed by the
Financial Accounting Standards Board (FASB) and the Securities and Exchange
Commission (SEC).
Examples are balance sheet, income statement and statement of changes in financial
position.
Examples are department profit and loss statements, statement of projected cash receipts
and disbursements, employee productivity reports. Reports may also be used for
benchmarking, practice valuations,(buy-in/buy-out).
A. Balance Sheet
B. Income Statement
The Income Statement helps to account for the change in retained earnings between the
beginning and end of the accounting period.
V. BALANCE SHEET
The Balance Sheet presents a snapshot at a moment in time of all past activities.
A. Assets – Economic resources that have the potential to provide future benefits to a
practice.
Current Assets – cash and other assets that are expected to be turned into cash,
sold or consumed within one year from the date of the balance sheet (cash,
prepaid expenses, A/R, inventories)
Fixed Assets – Those held and used for longer than one year (land, furniture,
equipment and buildings)
Intangible Assets –
Note order of liquidity – Assets quickly converted to cash are listed first.
Current Liabilities – Those that are expected to be paid within one year. (portion
of note payable to banks, A/P to suppliers, wages & payroll taxes)
Presents the results of the operating activities of a practice for a period of time.
A. Revenues – measure the inflow of assets in the form of cash and promises to pay
(accounts receivable) in cash in the future. (cash vs. accrual)
B. Expenses – measure the outflow of assets in the form of cash and promises to pay
(liabilities) in cash in the future. (cash vs. accrual)
For each expense, either an asset decreases or a liability increases (accounts payable).
Classifications
C. Net Income – A measure of the excess of net asset inflows from revenues over net
asset outflows from expenses for a period.
Examples:
Examples:
Reports the sources (inflows) and use (outflows) of cash during the accounting period. It relates
to the income statement in that it shows how operations affected cash. It explains the change in
cash caused by accounts receivables, inventories, buildings, equipment, etc.
B. Uses -Dividends
- Reduction in financing – repay liabilities, buy its common stock
- Buy land, buildings, equipment, etc. (noncurrent assets)
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Noncurrent Assets:
Equipment 210,000 310,000
Accumulated Depreciation 90,000 100,000
Total Noncurrent Assets 300,000 410,000
Total Assets $375,000 $538,000
Equity
Year 1 Year 2
Current Liabilities:
Accounts Payable – Suppliers $ 13,000 $ 33,000
Salaries Payable 8,000 11,000
Total Current Liabilities 21,000 44,000
Noncurrent Liabilities:
Loan Payable 60,000 160,000
Shareholders‟ Equity
Stock
Retained Earnings 15,000 35,000
Total Shareholders‟ Equity 279,000 299,000
Total Equity $375,000 $538,000
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Sources of Cash
Operations:
Net Income $ 20,000
Additions:
Depreciation Expense not using cash 10,000
Increased Accounts Payable 20,000
Increased Salaries Payable 3,000
Subtractions:
Increased Accounts Receivable 30,000
Increased Optical Inventory 15,000
Cash Provided by Operations 8,000
Proceeds of Loan 100,000
Total Sources of Cash $108,000
Uses of Cash
Purchased Laser $100,000
Total Uses of Cash 100,000
Modified
Assets Cash Cash Accrual
Cash X X X
Investments X X X
Notes Receivable X X X
Due From Employees X X X
Equipment X X
Equipment – Accumulative Depreciation X X
Inventories for Resale X X
Buildings X X
Buildings – Accumulative Depreciation X X
Leasehold Improvements X X
Leasehold Improvements – Accumulative Depreciation X X
Prepaid Insurance Premiums X X
Receivables From Patients X
A/R – Allowable for Uncollected Accounts X
Prepaids (other than Insurance Premiums) X
Liabilities
Equity
Partnership
Contributed Capital X X X
Undistributed Earnings X X X
Partners‟ Drawing Accounts X X X
Current Income/Loss X X X
Corporation
Stock (Common, Preferred, Treasury) X X X
Contributed Capital in Excess of Par X X X
Dividends X X X
Retained Earnings X X X
Current Income/Loss X X X
LLC‟s LLP‟s
Members‟ Capital X X X
Members‟ Distributions X X X
Current Income/Loss X X X
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For each dollar of assets used, we earned $.1817 before payments to suppliers of capital.
B. Accounts Receivable Turnover/Days in AR – This ratio indicates the number of days that it
takes your accounts receivable to turn over.
1st Method
Net Re venue
AR Turnover =
AverageAccounts Re ceivable
2nd Method
AccountsRe ceivable
Average Collection Period =
AverageDailyBilling
C. Inventory Turnover – Reflects how many times the inventory is sold during the period.
InventoryTurnover AnnualCostofOpticalGoodsSold
=
TimesPerYe ar AverageInventory
96,000 96,000
Turnover = = = 6 times
(14,000 18,000 ) 2 16,000
365
Average Days in Inventory = = 60.83 days
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CurrentAssets
D. Current Ratio =
CurrentLiabilities
This liquidity ratio indicates the ability of the practice to meet its current obligations. This is a
common liquidity ratio but its trends are difficult to interpret. An equal increase in current assets
and current liabilities results in a decline in the ratio and an equal decrease results in an increase
in the ratio (if assets exceed liabilities). We are looking for a number greater than 1.00.
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Cash MarketableSecurities
Accounts Re ceivable
E. Quick Ratio =
CurrentLiabilities
This liquidity is also known as the acid test ratio. Only the current assets that can be quickly
converted into cash are included in the numerator. A careful analysis should be done to decide
whether receivables should be included and inventory excluded because the inventory might be
converted into cash more quickly than the receivables.
Sales
F. Working Capital Ratio =
AverageWorkingCapital
Working Capital is assets minus liabilities. This ratio measures the turnover of inventory and
receivables into cash.
A profitability ratio that measures the effect of cost of goods sold on revenue.
Therefore, 65 cents of every dollar of sales is available to cover other expenses and to
yield a profit.
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A profitability ratio that measures the profit (Net Income) after paying for lens, frames
and all other expenses.
NetIncome
Net Profit Ratio =
Sales
This ratio indicates the revenue that is collected from each dollar charged. From this
ratio, you can estimate the amount of services that must be rendered to provide a certain level of
collections.
NetCollections
Gross Collection Ratio =
GrossCh arg es
This ratio is a function of your gross charges and may not be a good benchmarking
statistic.
This ratio indicates the revenue that is collected from each dollar of net charges. Net
charges are defined as gross charges less contractural adjustments. A collection ratio of less than
100 percent would occur from bad debts and/or an increase in accounts receivable.
NetCollections
Net Collection Ratio =
NetCh arg es
K. Contribution Margin
Revenues minus Direct Cost = Contribution Margin (Amount available to cover fixed
costs)
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A. Employer Taxes
1. Federal Unemployment
Rate - .008 on the first $7,000 of wages paid
Paid each quarter, but filed annually on Form 940/940EZ
2. State Unemployment
Rate – Experience Based
Filing – Quarterly
B. Employer/Employee Taxes
1. Medicare Tax
Rate – 1.45% on all wages paid during the calendar year.
Paid with each payroll, filed quarterly on Form 941
Sometimes these two taxes are referred to as FICA taxes with a combined rate of 7.65%.
C. Workers‟ Compensation
Rates are generally set by each state for each employee classification.
E. Work Time
Straight Time
Overtime
Comp Time
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A. Elements of a System
Chart of accounts.
Procedure manuals.
Division of duties.
Employment authorization forms.
Payroll rate authorization forms.
Competitive quotes from several vendors.
Independent count of merchandise received.
Bonding of employees.
B. Managements Responsibilities
An effective internal control system provides for custody over cash and other assets and protects
it from theft. The following procedures are necessary to provide effective controls by
segregating cash handling, record keeping, and verification.
Cash Fund
Cash Receipts
Cash Disbursements
Bank Reconciliation
A. Basis of Calculations
ExpenseofItem
Overhead =
TotalNetPa tientCollections
B. Important Ratios
Personnel (30.26)
Occupancy ( 7.57)
Marketing ( 1.13)
Total (53.86)
C. Other Bases
D. Benchmarking
The process of analyzing and comparing performance measures with other practices.
2. Fallacies to Consider
E. Expense Classification
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Relative Value Units (RVU‟s) – The Resource Based Relative Value Scale adopted RVU‟s to
represent the value of services. There are three components as follows:
Procedure code 99213 was originally given an RVU of one and all other services were scaled
from that code.
To adjust the national RVU‟s for regional cost differences, geographic practice cost indices
(GPCI‟s) were established for each component.
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RVU‟s
For most practices, the charges for each service were not established using the RBRVS system.
We priced each service so that our charge was equal to or greater than the highest allowable from
any payor. Therefore, using the assigned RVU‟s to develop a fee schedule may require repricing
all services.
Costs
Determine total costs, including desired physician compensation. Divide total costs by total
RVU‟s to arrive at cost per RVU. For each procedure code, multiply cost per RVU by the
RVU‟s assigned to that code.
Payor Contracts
As mentioned above, a common practice is to price each service to assure the price equals or
exceeds the highest amount paid by any payor.
Load allowables of each payor into your practice management system if it allows. Otherwise,
you are relying on personnel to catch payment errors.
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A. Purposes
Setting Fees
Break-even Analysis
Adding or dropping a service
Contract Negotiation
B. Type Costs
Fixed
Variable
Step Variable
C. Costing Methods
Traditional
Relative Value Units
Activity-Based Costing
D. Break-Even Analysis
Indirect Cost – Costs that do not vary with the volume of services.
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B. Type Costs
Incremental costs will reduce per unit profit initially. Potential increases in volume must be
sufficient to justify incurring incremental costs.
Break-Even Analysis
Fixed Costs
Fixed Variable Incremental Net Per Per Unit
Revenue Costs Costs* Costs Margin $Revenue Margin
100,000 160,000 20,000 (80,000) 1.60 <.80>
200,000 160,000 40,000 -0- .80 -0-
300,000 160,000 60,000 80,000 .533 .267
400,000 160,000 80,000 60,000 100,000 .40 .25
500,000 160,000 100,000 60,000 180,000 .32 .36
*20% of revenue
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C. Cost Methods
Traditional – Indirect and support costs are assigned to cost centers. These costs are then
assigned to outputs (revenue centers) based on volumes of items such as labor, machine hours,
units produced, etc. This method will provide inaccurate information when the cost center
resources are not u sed in proportion to the basis upon which they were allocated.
Relative Value Units – This costing method is easy to use but is not good for decision
making. Basically, all practice costs, except physician salary and benefits, are divided by the
total Relative Value Units to obtain a cost per RVU. Each service is then assumed to generate
costs directly proportional to the RVUs for that service. Costs are not associated to a service
based on the use of those resources represented by the costs.
Activity Based Costing – This method allocates all costs to services based on resource
utilization. It requires an understanding of the relationship between cost and services. To
identify the best indicators of the cost relationship requires an analysis of all activities performed
in the practice and determination of the resources used to perform each activity and what drives
costs. Cost drivers are used as the bases for assigning the costs to the services. A drawback of
this method is its high implementation cost.
To determine whether or not to add a new service, we often calculate the number of
services required to break even. This calculation requires use of the contribution margin
concept.
The contribution margin is the excess of revenue over variable costs. The contribution
margin less fixed costs yields net income.
Charges $500,000
Variable Costs 100,000
Contribution Margin 400,000
Fixed Costs 150,000
Operating Income 250,000
Based on the above income statement, variable costs are 20 percent of charges. Therefore, 80
percent of each dollar of charges is available to cover fixed costs. When sales reach a level that
the contribution margin equals fixed costs, we have a break-even level of sales.
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FixedCosts
Break-even Sales =
ContributionM arg inperDollarofSales
150 ,000
BES =
.80
BES = $187,500
Charges $187,000
Variable Costs 37,500 (20% of Sales)
Contribution Margin $150,000
Fixed Costs 150,000
Operating Income -0-
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XVII. BUDGETING
The budget provides a basis for setting priorities, allocating resources, and monitoring and
controlling revenues and costs.
A. Benefits
B. Components of a Budget
1. Operating Budget
2. Capital Budget
C. New Services
1. Estimating Volume
2. Payor Allowables
4. Financing Requirements
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XVIII. FINANCING
A. Operating Costs
2. Line of Credit
1. Leasing
2. Bank Loans
3. Retained Earnings
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A. Sole Proprietor
No protection between you and your business.
Personal assets are at risk.
No record keeping requirements by Secretary of State.
B. Partnership
Owners are called partners (Must have at least two or more)
Not a tax paying entity. (Activity of business flows thru to partners)
Can be formed with a verbal agreement.
Partners are jointly and severally liable for the actions of other partners.
No limit on types of owners.
Files document with the Secretary of State
Limited partners are not liable for partnership debt and only their investment is at
risk.
There has to be a general partner responsible for management.
C. Corporation
Owners are called stockholders (2 or more).
Separate legal entity.
Has perpetual life.
A tax paying entity (except when Subchapters Selection is made).
File Articles of Incorporation with the Secretary of State.
Statutory requirement for meetings, minutes, and resolutions.
Shareholders are generally not liable for debts of the corporation.
Subchapter S Status – a) allows taxation treatment similar to partnership.
b) stringent rules to maintain status.
c) limited to 75 owners.
d) owners must be individuals, estates or trusts.
e) corporation cannot own more than 80 percent of the
stock of other corporations and may not be part of an
affiliated group.
The LLC can have any two of the following and still retain its partnership tax
status:
a) Limited Liability
b) Continuity of Life
c) Centralized management
d) Free transferability of interests
Requires carefully drafted Operating Agreement
XVI. DEFINITIONS
Accounting: A system for measuring the results of business activities and communicating those
measurements to interested users. We will consider the concepts and procedures used by
accountants to make these measurements.
Accounts Payable: Amounts on open account owed by the organization to outside persons or
entities for goods and services received by the organization. These accounts are usually control
accounts for individual accounts payable balances that may be contained in a subsidiary ledger.
Accounts Receivable: The open account amounts (debts) owed to the organization by other
entities (including customers, patients and third-party payers) as a result of the services provided
to its customers and patients. Amounts assigned to “Accounts receivable” are due to “Gross fee-
for-service charges.” Assignment of a charge into Accounts receivable” is initiated at the time
an invoice is submitted for payment. For example, if an obstetrics practice establishes an open
account for accumulation of charges when a patient is accepted into a prenatal program, and the
charges will not be posted until after delivery, then “Accounts receivable” will not reflect these
charges until an invoice is created. Deletion of charges from “Accounts receivable” is done
when the account is paid, turned over to a collection agency or written off as a bad debt.
“Accounts payable (refunds) to patients and payers” are subtracted from “Accounts receivable”
before reporting “Accounts receivable.”
Accrual Basis of Accounting: An accounting method where revenues are recorded as earned
when services are performed rather than when cash is received. Cost is recorded in the period
during which it is incurred, that is, when the asset or service is used, regardless of when cash is
paid. Costs for goods and services that will be used to produce revenues in the future are
reported as assets and recorded as costs in future periods. The accrual method balance sheet
includes not only the assets and liabilities from the ash basis balance sheet, but also includes the
receivables from patients, prepayments, and deferrals of costs, accruals of costs and revenues and
payables owed to suppliers.
Accrued Liabilities: Current liabilities accrued at the end of an accounting period to reflect the
proper amount of expenses for the organization under the accrual basis of accounting. Generally,
no invoices or other billings are received within the accounting period, and the liability for these
items is estimated or obtained from other sources.
Acquisition (Historical) Cost: The cash or cash-equivalent paid to acquire an asset. (Balance
Sheet)
Assets: Resources owned by the business. Assets may be tangible (physical in character) such
as land, buildings and equipment, or a direct right to tangible property such as amounts due from
patients and third-party agencies, or they can be intangible such as goodwill, patents, licenses
and leaseholds.
Bad Debt Expense: This account is used for uncollectible accounts receivable and notes
receivable. An historical analysis of bad debt write-offs is usually required to determine periodic
credits to this account. Other methods may be used, but a consistent and justifiable method of
estimating the periodic charge to provision for bad debts (and the corresponding credit to either
the Allowance for Estimated Uncollectible Receivables account or the Allowance for Bad Debts
– Patients Account) should be applied systematically.
Balance Sheet: Also known as the Statement of Financial Position because it lists the
organization‟s assets, liabilities and owners‟ equity (capital) at a particular point in time. It is a
snapshot of the financial situation on a given date.
Lease transfers ownership to lessee during or at the end of the lease term.
Lease contains a bargain purchase option.
Lease term (including any bargain renewal options) is 75 percent or more of
estimated economic life of property.
Present value of the minimum lease payments (excluding tax credits and
executory costs, for example, maintenance, taxes and insurance) equals 90 percent
or more of fair market value of leased property, minus investment tax credit.
Capitalization: Expensing of the costs of furniture, fixtures and equipment over time. A
common criterion for capitalization is a unit cost of $500 or more. Other criteria for
capitalization include:
A unit cost sufficiently large to justify the cost of control incident to an equipment
or property ledger.
Depreciable life of two years or more but less than the life of buildings to which
the equipment or fixtures may be affixed.
Used in organizational operations.
Sufficient individuality and size to make control feasible by means of
identification tags or numbers.
Capitation: A set amount of money received or paid out according to an managed-care contract.
Also known as a “cap rate,” capitation is based on the number of enrollees in a health plan
(membership) rather than on actual services delivered. It is usually expressed in units of per-
member per-month (PMPM). A health plan may adjust the capitation rate based on such factors
as age and sex of the enrollee. A capitation contract is one in which the practice agrees to
provide medical services to a defined population for a fixed price per beneficiary per month,
regardless of the actual services provided. Capitated contracts, which always contain an element
of risk, include commercial HMO, Medicare and Medicaid capitation contracts.
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Cash-Basis Accounting: An accounting method where revenues are recorded when cash is
received and costs are recorded when cash is paid out. Receivables, payables, accruals and
deferrals arising from operations are ignored. On a pure cash basis, long-lived (fixed) assets are
expensed when acquired, leaving cash and investments as the only assets, and borrowings and
payroll withholdings as the only liabilities.
Chart of Accounts: A coding structure that provides the framework from which financial
statements and management reports can be developed.
Collection Agency Write-Offs: Any accounts turned over to a collection agency. The
corresponding accounts receivable should be credited.
Common Stock: A type of stock whereby equity claims are held by the “residual owners” of
the organization, who are the last to receive any distribution of earning or assets. It represents
the stated or par value of stock issued to owners.
Contractural Write-Offs: Differences between adjusted gross charges and the amount actually
collected as settlements for particular accounts. These write-offs may be the result of negotiating
a payment less than adjusted gross charges with an individual patient or third-party agency
(contractural adjustment).
Current Assets: Cash and other assets that are expected to be converted to cash, sold or
consumed in the normal course of operations within one year.
Current Liabilities: Liabilities that mature and require payment from current assets or through
the creation of other liabilities within one year.
Current Net Realizable Value: The net amount of cash you would receive if the asset was
sold.
Current Replacement Cost: The cash or cash-equivalent paid to acquire an asset with
equivalent service potential of the asset being replaced.
Deficit: The excess of expenses and other outflows over revenues and other inflows.
Donated Capital: Increase in owners‟ equity due to assets contributed to the corporation.
Financial Accounting: The preparation of reports for use by persons outside a company (bank,
investors). The need for some degree of uniformity requires that these reports are more
standardized than those used in managerial accounting and this standardization is provided by
the application of “generally accepted accounting principles” (GAAP). GAAP is developed by
the Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission
(SEC).
Financial Accounting Standards Board (FASB): The official rule-making body in the private
sector. It establishes a broad set of financial reporting objectives to guide the financial reporting
process and issues statements of Financial Accounting Standards.
Goodwill:
Gross Charges - FFS Equivalents for Capitation Plan Patients: Gross charges under
capitation contracts for assigned enrollees under a patient-care contract are recorded in this
account. This account is used to record accrual-basis revenues under risk-sharing arrangements
such as bonuses and risk-pool allocations; however, the Fees Collected account series should be
used to reflect revenues actually collected on these accounts.
Gross Charges: Established usual and customary rates are the full price for services before
charge restrictions imposed by Medicare or contractural adjustments required by third-party
payers, such as commercial insurance carriers or other adjustments. Services include all
medical/surgical services provided by physicians and midlevel providers as well as professional
and technical components of ancillary services such as radiology and laboratory.
Incurred But Not Reported (IBNR): This liability represents claims that the organization is
legally responsible to pay for services it has contracted with a managed care organization for on
a capitated basis and pays to subcontractors on a fee-for-service basis. It is an amount of money
that the organization accrues for future medical expenses. These are medical expenses that the
authorization system has not captured and for which claims have not yet been processed. IBNR
can be calculated in a number of ways. The most common method is to track the history of
claims payment for the specific organization to determine a claims‟ lag ratio and apply this ratio
to current operations. IBNR can also be calculated actuarially based on anticipated utilization of
a specific population. Another practical approach is to determine the number of referrals
authorized but not billed as of a particular date and apply an average claim amount to these open
referrals.
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Intangible Assets: Property rights without physical substance that will benefit future operations
of the organization. Intangible assets are purchased from external sources, provide future benefit
and are relatively long-lived. Other assets include long-term prepayments, deferred charges,
goodwill and assets not included in other categories.
Liabilities: Liabilities are debts or obligations owed by the organization to creditors. These
debts arise as a result of the purchase of goods and services from others on credit and through
cash borrowings to finance business operations. Liabilities are also obligations of responsibility
to transfer other assets or to provide services to another entity.
Limited Liability Company: A legal entity that is a hybrid between a corporation and a
partnership providing limited liability to owners like a corporation, while passing profits and
losses through to owners like a partnership.
Long-Term Assets: Assets that are not expected to be converted to cash, sold or otherwise
consumed in the normal course of operations within one year.
Long-Term Liabilities: Liabilities that will mature and require payment at some future time
beyond one year.
Managerial Accounting: The preparation of reports for use by persons within a company.
Net Assets: Excess of the not-for-profit entity‟s assets over its liabilities. The balances in these
accounts are the cumulative results of original investments, grants, gifts, donations, and revenues
and expenditures.
Noncurrent Expenses Paid in Advance: Costs incurred (payments) for goods or services that
will benefit future operations (beyond a year).
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Nonoperating Revenues: Revenues not directly related to patient care or the provision of
medical services.
Notes Payable – Long-Term: Notes payable that mature more than one year from financial
statement date. The current portion of any long-term liability should be included in Long-Term
Debt – Current Portion, except those obligations to be refinanced or paid from a sinking fund.
Notes Receivable – Short-Term: Amounts owed to the organization by other entities where the
obligation is represented by a note with a maturity of one year or less.
Occupancy Expense: Expenses related to the occupancy and use of land and buildings. In the
event that another legal entity owns the land or buildings, any rental fees, commissions or
charges paid to the other entity are charged to this account. For the purpose of peer comparison
(for example, comparative data or cost survey), a fair market rental value may be charged to this
account even if no rent is otherwise charged to the organization by the owning entity.
Operating Expenses: Expired costs incurred in the process of providing medical services to the
organization‟s patients. Excludes all costs pertaining to nonoperating activities such as general
investments, endowments, etc.
Organizational Costs: Costs incurred in the original incorporation and start-up of a business
operation. These costs are generally amortized over a period of five years.
Owners’ Equity: A residual interest or claim of the owners to the assets after creditor claims
are settled. (Legally, creditors are first in line to receive reimbursement.) Owners‟ equity derives
from two sources:
1) contributed capital, which is the investment of cash or other assets by the owner or
owners; and/or
2) retained earnings, the accumulative results of income, less losses and withdrawals over
the years.
Partnership: A legal entity where two or more individuals have agreed that they will share
profits and losses and assets and liabilities, although not necessarily on an equal basis. The
partnership agreement is typically formalized in writing.
Patient Refunds: Refunds of amounts collected from patients that should not have been
collected or that need to be returned for some other reason. The corresponding credit is cash or
accounts payable. This account should be used only if the specific revenue in which the payment
was originally recorded is not used.
Payroll Tax Withholdings Payable: Actual liabilities for Payroll Tax Withholdings. These
accounts are credited (increased) for amounts withheld from employees and are debited
(decreased) when payment is made to the appropriate agency, authority or plan.
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Preferred Stock: A type of stock whose holders are given certain priority over common
stockholders in the payment of dividends and liquidation/termination of the entity. Usually the
dividend rate is fixed at the time of stock issue.
Prepaid Expenses: Payments for goods or services that will benefit future operations.
Professional Corporation: A legal entity whose shareholders must typically all be licensed to
practice in the same profession as that practiced by the organization. State law determines
whether all shareholders must be licensed.
Provision for Cash Basis Conversion: An account used to convert revenues recorded on the
accrual basis to collections recorded on the cash basis. This adjustment is optional and is
provided for the organization that may wish to compute revenues on both the cash and accrual
basis.
Realized Gains and Losses – Investments: Gains or losses recognized on closed and sold
securities during the period.
Retained Earnings: Net income (or loss) over the life of the corporation minus all distributions
to owners.
Revenue and Expense Summary: A summary account for use in the closing of revenue and
expense accounts when financial statements are prepared.
Revenues: Inflows of cash and other items of value received or to be received for services
rendered. There are different measures of these inflows of cash for fee-for-service (FFS)
revenues, depending upon whether the organization identifies gross charges, adjustments and
allowances; whether the organization uses the cash, modified cash or accrual basis of accounting;
and whether a prepaid plan pays discounted FFS or capitation.
Securities Exchange Commission (SEC): The Securities Act of 1933 gave Congress the
ultimate legal authority to prescribe accounting methods to be used in preparing financial
statements for shareholders of publicly owned corporations. This authority was delegated to the
SEC, a federal agency. The SEC delegated most of the responsibility for accounting principle
development to the accounting profession.
Stockholders’ Equity: Net assets of the corporation; that is, the excess of the corporate entity‟s
assets over its liabilities. The balances in these accounts are the cumulative result of the owners‟
investments and the equity originating from net earnings retained by the corporation.
Surplus: The excess of revenues and other inflows over expenses and other outflows.
Treasury Stock: Capital stock repurchased by the corporation that has not been retired.
Treasury stock is usually carried on the balance sheet at acquisition cost.
Undistributed Earnings: Difference between revenues and expenses allocated to the partners
as earned capital. This account tracks the prior year‟s net earnings/losses.
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Unrealized Gains and Losses - Investments: The accounting recognition of the difference
between the fair market value of carried investments and the adjusted cost (current “book” value)
of those investments for the period.
Withhold: A percentage of the primary care capitation rate that is withheld every month and
used to cover the cost overruns (excess medical expenses) in referral or organizational services.
Typically used in capitation contracts or other risk-sharing arrangements, this account is
reconciled at year-end. If the entire amount of the withhold was not required to cover cost
overruns, the remainder may be distributed or kept in the account to fund the risk pool as
determined by contract terms.