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valuable for an organization that is in business but have much less value if the organization goes
out of business. (Finkler et al., 2007)
The third principle is the matching principle and cash vs. accrual accounting. This
principles allows organizations to provide a complete representation of a current fiscal years
activities. Cash transactions are the simplest ways to record revenues and expenses; payment is
received, revenue is recorded and when money is paid, expense is recorded. Problems arise for
organizations when care is given toward the end of the fiscal year and expense is recorded during
the new fiscal year. This causes profit to be overstated in the new fiscal year because the cost of
providing care is not reflected in the new fiscal year. (Finkler et al., 2007)
To avoid this problem, accountants devised the matching principle using accrual
accounting. This principle expects health care organizations to match revenues with the expenses
acquired to earn those revenues, and the organizations report them both at the same time. The
revenue record does not represent the receipt of payment, it is the implied promise of payment to
the health care organization. (Finkler et al., 2007) For instance, Dr. Smith provides a flu shot to
Mr. Jones. At the time of the visit, Dr. Smith collects Mr. Jones copay of $10 and bills Mr. Jones
insurance $20. The entire $30 is recorded as revenue at the time of care, even though the $20 is
not paid by Mr. Jones insurance company until the new fiscal year. Accrual accounting provides
a fairer picture of what has occurred in each year, it is required for organizations that prepare
their financials in accordance with GAAP (Finkler et al., 2007, p. 105).
Cost principle refers to the value of assets at the time of purchase. Assets are recorded on
the balance sheet at cost, which equals the value exchanged at the time of purchase ("Generally
Accepted Accounting Principles," 2014, para. 10). Some exceptions to this rule pertain to the
depreciation of some assets over a period of years. For instance, equipment owned by the
organization may appear on the balance sheet at a lower amount than the original purchase price.
This is referred to as the net book value because it represents cost less the accumulated
depreciation that has been recorded all the years the equipment has been owned. (Finkler et al.,
2007)
Over time many assets may vary from their original cost and may cause serious problems
in the interpretation on the balance sheets. Value of land owned by the organization may rise, yet
remain on the balance sheet at its original cost. This is due to the objective evidence principle.
The principle of objective evidence holds that information reported on financial statements
should be based on objective, verifiable evidence. This is evidence on which a wide group of
different individuals could all be expected to agree (Finkler et al., 2007, p. 105). Most assets are
recorded at the value of their cost, as agreement is easily reached on the exact amount that was
paid to purchase the asset. (Finkler et al., 2007)
Errors in accounting occur and would be costly to a health care organization to eliminate
all errors. Accountants use the materiality principle to decide which errors to ignore. Materiality
principle states that the requirements of any accounting principle may be ignored when there is
no effect on the users of the financial information. ("Generally Accepted Accounting Principles,"
2014, para. 14). A standard dollar amount is not used when deciding on the error. An error in a
financial report that would cause a user of the financial statement to change a decision is
material (Finkler et al., 2007, p. 106). The accountants job is to decide in a given situation what
amount of money is large enough that is would affect decisions of users of the financial
statement. Errors must be discovered and corrected by the accountant prior to the release of the
financial statement. (Finkler et al., 2007)