HCS/380 Week 1: Health Care Accounting Fundamentals, sample paper

A Profit of $6,900 or a Loss of $14,100? Recording a New Counseling Practice's First Month Under Accrual and Cash Accounting

[Student Name]

University of Phoenix

HCS/380: Health Care Accounting

Week 1 Assignment

[Instructor Name]

[Date]

The practice, owners and all figures are a composite written for a model paper.

Two licensed clinical social workers opened a composite outpatient counseling practice as a limited liability company, with three additional therapists and a part-time office manager. After the first month, one owner looked at the bank balance, saw that it had dropped by more than $14,000 from the day the practice began seeing clients, leaving aside the loan, the owners' investment and the equipment purchase, and worried the practice was failing. The other owner pointed out that the practice had seen more clients than planned and that insurers had not yet paid most of the claims. Both owners were right about the numbers; they were looking at two different measures of the same month. This paper records the month's transactions and explains the difference.

The Accounting Equation

Accounting rests on a simple identity: assets equal liabilities plus equity. Assets are resources the organization controls, liabilities are what it owes and equity is the owners' residual claim (Pink & Song, 2020). Every transaction changes at least two accounts so that the equation stays in balance.

The Month's Transactions

The owners invested $120,000 in cash. Assets rose by $120,000, and owners' equity rose by the same amount.

The practice borrowed $60,000 from a bank at 6% interest to furnish its offices. Cash rose by $60,000, and a loan payable, a liability, rose by $60,000.

It bought furniture, computers and soundproofing for $42,000 in cash. One asset, equipment, rose, and another, cash, fell. Total assets did not change.

It paid three months' rent in advance, $13,500. Cash fell, and prepaid rent, an asset, rose. The rent is an asset because it pays for future use of the space.

The therapists provided 410 sessions. At the practice's full fees, charges were $61,500, but after insurers' contracted rates, the practice expects to receive $44,300. That expected amount is the revenue earned. Clients paid $9,800 in copayments at the time of service, and the remaining $34,500 became accounts receivable. Later in the month, insurers paid $12,600 of those receivables, which moved from accounts receivable to cash.

Salaries earned by staff for the month were $31,000. The practice paid $23,000 on its payroll date, and the last $8,000, for days worked after the payroll cutoff, will be paid next month, so it is recorded as wages payable.

The practice bought $2,400 of office and testing supplies on credit, recorded as supplies and accounts payable, and used $900 of them.

Adjusting Entries

At month-end, three adjustments recognize expenses that had been incurred but not yet recorded. One month of prepaid rent, $4,500, was used and moves from prepaid rent to rent expense. The equipment will be used for about five years, so one month of depreciation, $42,000 divided by 60 months, or $700, is recorded as an expense and reduces the equipment's book value. And one month of interest on the loan, 6% of $60,000 divided by 12, or $300, is owed but not yet paid, so it is recorded as interest expense and interest payable (Zelman et al., 2014).

The Accrual Income Statement

On the accrual basis, the month's revenue is $44,300. Expenses are salaries of $31,000, rent of $4,500, supplies of $900, depreciation of $700 and interest of $300, for a total of $37,400. Net income is $6,900.

The Balance Sheet

At month-end, cash is $123,900: the $120,000 investment plus the $60,000 loan, less $42,000 for equipment, $13,500 for rent and $23,000 in salaries, plus $9,800 in copayments and $12,600 from insurers. Accounts receivable are $21,900, prepaid rent is $9,000, supplies are $1,500 and equipment, net of depreciation, is $41,300. Total assets are $197,600.

Liabilities are the $60,000 loan, $2,400 in accounts payable, $8,000 in wages payable and $300 in interest payable, a total of $70,700. Equity is the $120,000 investment plus the month's $6,900 net income, or $126,900. Liabilities plus equity equal $197,600, matching total assets.

The Cash Basis View

On the cash basis, the same month looks very different. Cash received from clients and insurers was $9,800 plus $12,600, or $22,400. Cash paid for operating costs was $23,000 in salaries and $13,500 in rent, a total of $36,500. The owners' investment, the loan and the equipment purchase are financing and investment flows, not operating income. Operating cash flow was therefore a loss of $14,100, which explains the first owner's alarm.

Why the Two Measures Differ

The $21,000 difference between accrual income of $6,900 and the cash loss of $14,100 comes from timing. Revenue of $21,900 was earned but not yet collected. Two months of rent, $9,000, were paid in advance but belong to future months. Some expenses were incurred but not paid: $8,000 in wages and $300 in interest, while $900 of supplies were used but bought on credit, and depreciation of $700 reflects equipment paid for in cash earlier. Netting these differences reconciles the two measures.

Generally accepted accounting principles require accrual accounting because it matches revenues with the expenses incurred to earn them in the same period, giving a truer picture of performance (Cleverley & Cleverley, 2018). But cash is what pays the bills. A new practice with slow insurer payments can be profitable on paper and still run short of cash, which is why the owners need both a statement of operations and a cash flow projection.

What the Owners Should Do

The accrual statement shows the practice is already profitable in its first month, which is encouraging. The cash view shows the risk: with insurers typically paying in 30 to 45 days, the practice will carry a sizable receivable as it grows. The owners should track days in accounts receivable, submit claims within 48 hours of each session and keep a cash reserve large enough to cover at least two months of payroll.

Conclusion

The same month produced a $6,900 profit under accrual accounting and a $14,100 operating cash loss. Recording each transaction through the accounting equation and making month-end adjustments shows why: revenue earned but not collected, rent paid in advance and expenses incurred but not paid. Health care managers need to read both measures, because an organization must be profitable to survive in the long run and must have cash to survive this month.

References

Cleverley, W. O., & Cleverley, J. O. (2018). Essentials of health care finance (8th ed.). Jones & Bartlett Learning.

Pink, G. H., & Song, P. H. (2020). Gapenski's healthcare finance: An introduction to accounting and financial management (7th ed.). Health Administration Press.

Zelman, W. N., McCue, M. J., Glick, N. D., & Thomas, M. S. (2014). Financial management of health care organizations: An introduction to fundamental tools, concepts, and applications (4th ed.). Jossey-Bass.