Administrators unravel the accounting maze

Chicago-Understanding the accounting equation can mean the difference between paying more or less taxes at the end of an operating year.

A balance sheet, for example, gives stakeholders and shareholders a way to value their time and investment in a practice, said Kent B. Bone, MBA, COE, of Mid-Florida Eye Center, Mount Dora, FL, in a presentation on "Accounting 101 for Administrators" at the annual meeting of the American Society of Ophthalmic Administrators.

Bone also defined additional accounting terms that administrators are likely to encounter frequently.

The accounting equation-assets minus liabilities equals equity-is the most important factor to remember, he said.

Understanding this basic process will allow administrators to master bookkeeping, he added.

Profit and Loss Statements (P&L) lay out revenues and expenses. A P&L is also known as a statement of income and represents the sum of all profits generated for a stated period. It includes both revenues and expenses, but it's not an account.

"Whether you're looking at a month of operations or a year of operations, a profit and loss statement will tell you how it's going," Bone said.

Assets

Assets, he said, are things that have value, items the practice owns at cost. Assets can come into the practice through purchases, contributions, or from investors. There are tangible assets-cash, accounts receivable, inventory-that can be converted to cash within one operating year, and fixed assets-land, buildings, equipment. There also are intangible costs, like deposits, goodwill, and loan costs, which are not easily controlled or touched.

Assets are ranked by order of liquidity-how quickly an asset can be converted to cash. Inventory, for example, cannot be easily converted to cash. Financial statements, Bone said, are presented in order of liquidity.

"Historical costs are what you'll find on a balance sheet," Bone said. "Cash is an asset. If an asset isn't consumed in a business cycle, it needs to have a value on the balance sheet."

A business cycle can be anything from 1 month to 1 year, depending on how the practice runs. When the financial statement is closed out at the end of one operating year, everything should revert to cash.

"We close our financial books on a monthly basis in the medical field," Bone said. "Cash flow is a whole lot like real estate-location, location, location. If you don't have cash flow in the practice, don't worry about the paycheck-it won't be there."

A statement of cash flows, also known as a statement of changes and financial position, shows a physician where the cash came from and where it went.

The concept of matching principle takes financial statements down to the simplest step. The principle matches the costs associated with a procedure to the revenues brought in by performing the procedure. For example, for every refraction a physician performs, also figure in the deprecation on the refraction equipment, rent, and any other costs associated with the revenue generator-in this case, the refraction.