Generally_Accepted_Accounting_Principles

Generally Accepted Accounting Principles Generally Accepted Accounting Principles Generally Accepted Accounting Principles, also known as GAAP, is a set of rules and guidelines for accounting standards, used by accountants to prepare financial statements and to summarize and record transactions. GAAP rules are used by most organizations to report transactions. This allows a consistency in organization’s recording measures so a comparison between organizations can be obtained. The standards of GAAP have been developed over a long period and are complex. There are many rules for accounting for varying types of transactions. GAAP standards allow financial statements to show reporting of transactions with consistency (Bradford, 2007). Both financial and managerial accounting must be considered in the principles of accounting. Managerial accounting depends on the principles of financial accounting since it does not have its own adopted principles. There are five principles of accounting that applies to both financial and managerial accounting; Accounting Entity, Money Measurement, Duality, Cost Valuation, and Stable Monetary Unit (Cleverly, Song, & Cleverly, 2011). The first principle is Accounting Entity. When financial statements are being prepared, the place where this takes place must be recorded. This is the accounting entity. Examples of accounting entities are hospitals, home health agencies, nursing homes, and ambulatory surgery centers. Many problems may occur when the entity is being defined. One cause of problems occurs when the legal and accounting entities differ. This may happen when a physician owns a private clinic. The physician’s clinic operation and personal resources may operate using different accounting entities. In this example, the accounting entity must be clear and concise when it is defined, or the financial information can be mislead or useless (Cleverly, Song, & Cleverly, 2011). The second principle is Money Measurement. General accounting deals with economic measurements and obligations. Every transaction is measured in terms of money. The accountant is only concerned with money. Many problems may arise during money measurement. Since all transactions occur on a quantitative basis, many items do not appear on organizations financial statements. This may affect the finances of health care organizations. For example, employee working conditions cannot be included on balance sheets because they cannot be listed in terms of money. If the working conditions are not good, there may be a higher employee turnover rate, which will cause more labor expenses for the organization. With health care organizations, this may contribute to the already established nursing shortage (Cleverly, Song, & Cleverly, 2011). The third principle is Duality. This principle is defined by using arithmetic. The values of liabilities and net assets added together equal the value of assets. This simple equation will make the balance sheets always balance. The values in liabilities, net assets, and assets will vary due to a constantly changing health care world. Examples of these changes include purchasing supplies, renovating buildings, and borrowing money; these are also called transactions. When the transactions increase in health care organizations, there is an increase in assets and liabilities. Health care organizations have a large number of transactions. Hospitals usually categorize their transactions for better uniformity (Cleverly, Song, & Cleverly, 2011). The fourth principle is cost valuation. Many accountants prefer to use cost valuation because it is more objective. When reading financial statements, assets and liabilities are listed as the value of when they were first purchased. This is misleading because, more than likely, they do not equal the amount of money that could be obtained if they were sold. Cost valuation is an alternative because assets and liabilities are viewed as market and replacement cost valuation. Health care organizations use cost valuation to determine the full cost of providing services to clients. For management to make sound decisions, the full cost must be known at all levels, including, department, patient, and procedure (Cleverly, Song, & Cleverly, 2011). The fifth principle is Stable Monetary Unit. This principle uses a concept that there is a stable value maintained by the dollar. Accounts are not adjusted by accountants for inflation; however, the purchasing power of the dollar is not lost. For example, the dollar amount in 2000 is equivalent to the dollar amount in 2010. The effect of inflation can be ignored by accountants in accounting records. For example, health care organizations may have a huge cash deficit if their rates are set to historical cost depreciation, when it time for the asset to be replaced. This is why most health care organizations do not use an increased replacement cost in their reports. Assets are reported as dollar amounts by accountants. Balance sheets will not have any assets listed that cannot be reported in dollar amounts (Cleverly, Song, & Cleverly, 2011). GAAP is a set of standards which allows potential investors to have a reliable view of an organizations financial status. The above set of principles assures organizations are consistent with their reporting measures. GAAP has been developing for years and will continue to change as often as there are changes in the environment. References Bradford, T. (2007, August). An Explanation of Generally Accepted Accounting Principles (GAAP). Accounting by Suite 101. Retrieved from http://www.suite101.com/content/what-is-gaap-a28142 Cleverly, W. O., Song, P. H., & Cleverly, J. O. (2011). Essentials of health care finance (7th ed.). Sudbury, MA: Jones and Bartlett Learning.