Generally accepted accounting principles (GAAP), are standards and guidelines for financial accounting, and reporting, (Office of Financial Management, 2012). There are guidelines in effect for most organizations; GAAP ensures that the finances of an organization are correct. According to Cleverly, Song, and Cleverly (2011), GAAP describes the “body of rules and requirements that shape the preparation of the four primary financial statements,” (p. 182, para 3). The four financial statements are balance sheets, statement of operations, statement of cash flows, and statement of changes in net assets, (Cleverly, Song & Cleverly, 2011).
According to the Office of Financial Management (2012) website, the Governmental Accounting Standards Board (GASB) has a hierarchy for state and local governments pertaining to GAAP; (1) GASB statements and interpretations, (2) GASB technical bulletins, (3) American Institute of Certified Public Accountants (AICPA) practice bulletins, and (4) Implementation guides. Accounting principles are guidelines that businesses and organizations use to prepare financial statements. The principles of accounting include: accounting entity, money measurement, duality, cost valuation, and stable monetary unit, (Cleverly, Song & Cleverly, 2011).
Stable monetary unit deals with inflation and the value of a dollar. The monetary unit of measure is a dollar, (Cleverly, Song & Cleverly, 2011). The value of the dollar remains the same however; inflation does play a role in the value of the dollar and how much the dollar can purchase. The amount of money the hospital spends on items in 10 years may not be the same, when compared to today. Cost Valuation deals with market value, and replacement cost valuation, (Cleverly, Song & Cleverly, 2011). The value at the time of acquiring a business or property is the set value of the property, even if the value of the asset has increasing value.
Most hospitals improve the image of the facility to help improve customer satisfaction; however, making the improvements improves the value of the assets, but it does not change the set value on record. There are two types of entity: accounting entity, and legal entity. According to Cleverly, Song and Cleverly (2011), accounting entity is the “organization, for which financial information is recorded, and reported,” (p. 183, para 8). Legal entity can vary from the accounting entity if the organization is a private practice.
In the private practice setting, the legal entity pertains to the owner, and his or her personal issues, whiles the accounting entity deals with the operation or the practice. In the hospital setting, the legal and accounting entity are the same, the issues relate to the benefit of the organization. Money measurement relates to measuring economic resources, and obligations, (Cleverly, Song & Cleverly, 2011). Economic resources and assets are the scarce means, such as supplies, money, ownership interests, and buildings, (Cleverly, Song & Cleverly, 2011).
Economic obligations and liabilities relate to providing services in return for economic resources, (Cleverly, Song & Cleverly, 2011). Measurement focuses on the financial transactions that occur and how the organization reports the transactions in financial statements, (Office of Financial Management, 2012). Organizations continue to expand the organization through adding more buildings, expanding units or wings. Expanding helps bring in more clientele, creates an environment for improvement in patient care, and also increase funds for the organization. Duality relates to value and assets.
According to Cleverly, Song & Cleverly, (2011), the value of assets must always equal the combined value of liabilities and residual interest; assets = liabilities + net assets,” (Cleverly, Song & Cleverly, 2011, p. 185, para 1). Transactions are a part of duality; transactions affect the value of assets. Transactions include purchasing items, lending funds, borrowing funds, and constructing buildings, (Cleverly, Song & Cleverly, 2011). When organizations purchase other buildings, and invest in the value of the organization, they must ensure that things equal out; money going out should match what is coming in.
Finances affect how an organization operates. Budgets are put in effect to help organizations to be successful, and allocate certain funds toward certain things. Without knowing financial situations, and how the budget works, most organizations may not last. Employers should also obtain his or her employees input about the finances. Even though the employer may not use all of the employees input, the information obtained can help with allocation of the budget. Balancing the budget may take time, and effort, however, for businesses to be successful, GAAP standards need to be in effect.