Discussion: Foundational Accounting Concepts
Although it is important to be familiar with foundational accounting concepts and to understand how they are calculated, it is equally important to recognize how the information from these calculations fits into the larger picture of daily actions in hospitals. Consider the simple task of taking patients their dinner trays. Think of all of the different costs that are involved. The dietitian must be paid, as well as the food handlers. The food has to be purchased as well as the trays and utensils. Trays must be delivered, picked up, and cleaned. A cost is incurred at each stage.
In this Discussion, you consider how the costs of the daily tasks performed by nurses are accounted for and impact cash flow.
Review this week’s Learning Resources focusing on the difference between accrual accounting and cash accounting. Conduct additional research as needed until you are confident that you grasp the distinction between the two approaches.
Consider why you would select one approach over the other and the effect it would have on financial decision making. Determine how you could explain these concepts to someone not familiar with accounting.
Select a task you might perform daily, or an item that you might use daily in the workplace, and determine where the cost should appear on a balance sheet.
Reflect on the role of cash in the financial operations of an organization. How could cash flow issues impact your own organization (or one with which you are familiar)?
- By Day 3
- Post an explanation of the difference between accrual accounting and cash accounting, and when each might be used. Then, describe a task you might perform or an item you might use daily, and explain where the cost should appear on a balance sheet, and why. Finally, assess how cash flow issues could impact your own organization (or one with which you are familiar).
Expert Solution Preview
Accrual accounting and cash accounting are two different methods used in recording and reporting financial transactions. Accrual accounting recognizes and records revenue and expenses when they are incurred, regardless of when the cash is actually received or paid. Cash accounting, on the other hand, records revenue and expenses only when cash is received or paid.
The choice between accrual accounting and cash accounting depends on the purpose of the financial information and the type of organization. Accrual accounting is more commonly used in businesses and organizations where the focus is on matching revenues and expenses to the period in which they occur. This method provides a more accurate representation of the financial performance and position of the organization.
In contrast, cash accounting is simpler and easier to implement. It is commonly used by small businesses or individuals whose primary concern is cash flow management. Cash accounting provides a more immediate view of the actual cash inflows and outflows of the organization.
To explain these concepts to someone not familiar with accounting, I would use simple examples. For accrual accounting, I would explain that it focuses on recording revenues and expenses when they are earned or incurred, even if the cash hasn’t been received or paid yet. For cash accounting, I would explain that it records revenues and expenses only when the cash is actually received or paid.
For example, let’s consider the task of administering medication to patients. The cost of the medications should be recorded as an expense on the balance sheet under the “Supplies” or “Medications” category. This cost should be recognized when the medications are administered, regardless of when the payment for the medications is made.
Cash flow issues can significantly impact an organization’s financial operations. If an organization is experiencing cash flow problems, it may struggle to meet its financial obligations, such as paying employees or suppliers. This can lead to delayed payments, strained relationships with stakeholders, and even the risk of bankruptcy. Proper cash flow management is crucial to ensure the smooth functioning and sustainability of the organization.