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Generally Accepted Accounting Principles

Essay by   •  August 31, 2011  •  Research Paper  •  942 Words (4 Pages)  •  2,513 Views

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Generally Accepted Accounting Principles

Generally Accepted Accounting Principles, or GAAP, is an accounting language of business used in health care facilities that have specific policies they must abide by when making choices for the direction of the institution. The Financial Accounting Standards Board, also known as FASB, developed these rules to guide them in recording and reporting financial information. Organizations use GAAP rules to report transactions. GAAP policies help to have consistency in business recording measures so comparisons are possible. The five principles of accounting include accounting entity, money measurement, duality, cost valuation, and stable monetary unit (Cleverly, Song, & Cleverly, 2011). In this paper, these concepts are discussed with an example for the relativity toward health care.

Accounting Principles

"The set of GAAP fall under specific definitions and are strategically created with intent behind each of them" (Bradford, 2007). Accountants use an existing set of principles that rely upon underlying assumptions. Assumptions mentioned in this paper are GAAP and apply to practically all financial statements. In addition to these concepts, accountants must follow more methodological standards while organizing financial statements.

Accounting Entity

The recorded location in the preparation of financial statements is accounting entity. Accounting entities can be nursing homes, hospitals, surgical centers, and home health agencies. When accounting entities differ, problems may occur. This can happen if a physician owns a private clinic and that clinic and personal resources operate using different accounting entities. The accounting entity must be concise and clear when defined or the financial information can be useless or misleading (Cleverly, Song, & Cleverly, 2011).

Money Measurement

The money measurement concept is the principle that money is used in the measurement of all financial transactions. This principle also assumes the unit of measure is stable. All transactions occur on a quantitative basis. In this respect, some items do not appear on the financial statements of organizations. An example of this is an employee's working condition. Working conditions are not included in the organization's financial statements because it is not measurable in money. If the working environment is poor, employee retention rates decrease, which will produce an increase in labor expenses for the organization. This may contribute to the already established nursing shortage (Cleverly, Song, & Cleverly, 2011).

Duality

Duality is the concept that every transaction has two effects. A health care facility can purchase new assets such as computers. Fixed assets will increase, which will also increase their liabilities or cash. The values of liabilities and net assets added together equal the value of assets. This equation balances financial sheets all the time. The values in liabilities, net assets, and assets varies in relation to a constantly changing health care world. Health care organizations have a large number of transactions. Hospitals

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