Essay on "Accounting Practices"

Essay 3 pages (865 words) Sources: 2

[EXCERPT] . . . .

By requesting that each of his medical supply vendors holds off on sending payment for outstanding invoices until the beginning of a new year, a family practitioner can easily reduce their net income for the past year, and thus reduce the impact of their eventual tax hit. This practice is nearly universal among small medical facilities, and is used particularly often during prolonged stretches of difficult economic conditions, when patients are typically under external budgetary pressures which prevent them from paying for medical care up front. By artificially inflating or deflating income in order to reduce tax liability for a given year, cash-basis accounting allows small family practitioners to level the proverbial playing field, by giving them the chance to present income statements that more accurately reflect the day-to-day operations of their family practice.

Conversely, large multinational medical corporations such as Tenet Healthcare Corp. And the Hospital Corporation of America have long used accrual accounting to manage the payroll complications of thousand-member workforces, to shield themselves from paying appropriate taxes on massive profits, and to create tax liability accounts for employee taxes. Every incorporated hospital in the United States must use accrual accounting, according to the generally accepted accounting principles (GAAP), and the annual financial reports and investment prospectuses sent to stockholders each year are premised on the results of this accounting method. The benefit of accrual accounting for major medical care corporations, for which posting multiple quarterly losses can significantly impact their ability to deliver quality health care and inpatient services, lies in the practice's ability to guard against such losses. Because cash-basis accounting would result in months of steady profit being interrupted when tax bills are paid, accrual accounting allows for the formation of tax liability accounts which separate those payments into proportional allotments. This technique enables corporations to spread these losses evenly over 12 months, rather than absorb major losses every quarter which would scare off potential lenders and damage their reputation with patients and investors alike.

References

Accrual accounting (2010, May 09). Forbes Financial Glossary, Retrieved from http://www.forbes.com/sites/forbesfinancialglossary/2011/07/12/accrual-accounting/

Cash basis accounting. (2011, June 21). Investopedia, Retrieved from http://www.investopedia.com/terms/c/cashbasis.asp?partner=forbes-pf

Financial Accounting Standards Board of the Financial Accounting Foundation. (2011, July). Presentation and disclosure of patient service revenue, provision for bad debts, and the allowance for doubtful accounts for certain health care entities: A consensus of the fasb emerging issues task force . Accounting standards update: health care entities (topic 954), Norwalk, CT. Retrieved from http://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable=MungoBlobs&blobkey=i'd&blobwhere=1175822797036&blobheader=application/pdf READ MORE

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