Chapter 20 Notes: Accounting Practices

What is the procedure for preparing accounts receivable trial balance?

1) Gather all of your necessary supplies or equipment and make sure that they are in good working order before beginning any procedure. For this particular procedure, you will need to have a patient account and a calculator. 2) Pull all patient accounts that have a balance due. This provides only amount due information. 3) Enter the balance of those accounts into the calculator. 4) Add the balances and total. A calculator with tape can make it quicker to check for errors. This gives you the total amount due to date. 5) Create an accounts receivable total 5a) Enter the accounts receivable total from the first of the month into the calculator 5b) Add total charges for this month and subtotal 5c) Total the amount of all payments received this month 5d) Subtract the total of payments from subtotal of b above and subtotal 5e) Total the amount of the month's adjustments and subtract from the subtotal in d above 5f) This total is the accounts receivable amount. The end-of-the-month accounts receivable total (f) above must match the total in step 4. If these totals do not match, an error has been made. If they do match, the trial balance is in order.

What are the guidelines for performing accounts payable management tasks in the medical office?

1) Accounts Payable: Accounts payable are an unwritten promise to pay a supplier for property or merchandise purchased on credit or for a service rendered. Accounts payable are the most common liability or financial obligation in the clinic setting. These include expenses such as medical and office supplies, salaries, equipment, and services. Payments for these expenses are made by check to ensure complete, accurate records of all money received and disbursed 1a) Supplies and equipment purchased usually come with a packing slip that describes the items purchased and their cost. An invoice may also be enclosed that serves as a bill for the items ordered; however, another invoice is sent to the business later as well. Take time to note on the invoice whether there is a discount for early payment. Some financial managers suggest attaching the invoice and packing slip to the purchase order. File in your tickler file or reminder file on the computer so that payment is made in a timely fashion to receive any discount. Some vendors prefer that payment not be made until a statement (or request for payment) is received from them. This is particularly the case if the practice uses that vendor more than once a month. When the statement arrives, check the invoice for accuracy before sending payment. Prepare the check for the accounts payable as appropriate, either monthly or as necessary to receive a discount. Write the check number on the invoice, as well as the amount paid, and place in a file for accounts paid according to the practice filing system 2) Disbursement records: Computerized accounts payable systems track the disbursements and post to appropriate established accounts similar to a manual system. Computer accounts payable systems have a check register that records all checks written and categorizes them into separate columns, such as rent, insurance, office supplies, utilities, and so forth. These categories can be designed to be as general or detailed as preferred. The computer system also can create entries for bank deposits and payroll records. 2a) The computer software has a check-writing file that presents checks on the screen. The information necessary to complete the check is entered at the keyboard; the computer stores it and prints out the check. Printing the checks can be done individually or by batch if several bills are being paid. The amount is automatically subtracted from the account's balance. The computer system also can recall data that need to be entered on the checks each time there is a payment. For example, the name of the company where most supplies are purchased can be recalled from the database; thus the medical assistant does not have to key in that information again. This feature is a particular timesaver when payroll checks are prepared. 2b) The manual or pegboard system uses a check register page to record checks written. The check is aligned on the pegboard over the check register before completion. The pegboard checks have an NCR transfer strip that copies the date, the payee, the check number, and the amount to the check register. Pegboard checks can be designed so that the address is entered beneath the payee line and mailed in a window envelope. This check register has a number of columns to categorize expenses. All entries are totaled on the check register when completed, and these totals are carried forward. A balanced check register provides a way to verify the bank statement when it arrives. The check register can also be used for bank deposits and for payroll records.

What are the two major categories of accounting?

1) Financial accounting 2) Managerial accounting

What are the legal and ethical guidelines in accounting practices?

1) It is hoped that a careful hiring process results in the best employees whose credentials, ethics, and personal actions are above approach. However, embezzlement does occur in medical practices, partly because of the way in which the financial aspect of the practice is designed and managed. To decrease the opportunity for embezzlement: 1a) The accountant and the managing providers should conduct regular and irregular audits of the practice accounts. Seek an accountant who is available at any time, not just when it is time to report wages or compute the yearly taxes. The accountant also becomes a valuable asset to the practice in providing essential information to the clinic staff 1b) Separate duties among several employees. Consider having one employee open the mail and post checks received. A second employee handles all the cash transactions and prepares the deposit slips. A third employee might order the supplies and prepare all the checks. Many providers choose to sign the checks; however, this is also a task that can be assigned to the office manager. 1c) Only one person should use the signature stamp; better yet, consider not using a signature stamp at all 1d) The signature card on file at the bank must include the names of each individual authorized to sign the checks. 1e) Seek employees whose personal honesty sets a good example for everyone Providers who demonstrate the same personal honesty and integrity expected of their staff are less likely to be victims of embezzlement. 2) Bonding: There is another recommended step to take. To protect the practice from embezzlement or other financial loss, providers can purchase fidelity bonds. These bonds reimburse the practice for any monetary loss caused by the practice's employees. There are three types of bonds to consider, and it is reasonable to have more than one type. These bonds include: 2a) Position-schedule bonds, which cover the position rather than a specific individual. For instance, the bookkeeper, office manager, and receptionist might be covered. 2b) Blanket-position bonds, which cover all employees. If the staff members often share duties, cover for one another when there are absences, or work really well together as a team during busy periods, this type of might be most beneficial. 2c) Personal bonds, which are designed to cover specific individuals by name and generally require a personal background investigation. This type of bond may give the most assurance. Bonding not only protects the providers and the practice, but it assures employees that they are covered by a bond should there be a problem with the finances during their shift. Bonding service companies will require implementation of certain procedures and security measures as outlined in their contracts. Costs depend on risk levels, but they are well worth the protection. 3) Payroll: The administrative medical assistant is likely to be involved in making certain the W-4 form, the Employee's Withholding Allowance Certificate, is completed by all employees. However, salary calculations, withholding taxes, and social security calculations are the responsibility of the office manager or, may be outsourced to a payroll service. Payroll tasks usually are assigned to the clinic manager or a service because of the privacy of salary issues, social security numbers, and confidentiality of the employees' tax information. Manual systems for managing payroll are available, but the most efficient systems are computerized. 4) Utilization Review: In the present health care climate, in which there are many managed care plans, more attention has been focused on how the billing and financial management process should proceed. Because of the influence of governmental mandates in the practice of medicine and because of the growth of the utilization review (UR) industry, more accurate record-keeping and documentation in all facets of the clinic have become necessary. There are numerous UR Arms throughout the country. These companies aggressively sell their services to employers and to insurance carriers. UR is actually a review of the patient service required before the actual service may be performed. If the reviewer determines that the procedure or treatment is not needed, then it will not be approved or covered under the patient's insurance plan. Policies that once permitted medical decisions to be made solely by the provider often are now made by other health professionals who are employed by UR Arms. Some clinics may find it beneficial to have one medical assistant whose main responsibility is to present procedures to UR for acceptance or denial. Because of the increasing concern for quality of health care at low cost, more providers also are realizing that they need more documentation of both medical and financial information with more accessible means for retrieval.

What are tips for finding errors?

1) Some tips for finding errors are as follows: 1a) Check the addition of each column, both horizontally and vertically. If a calculator is used, check the tape for entry errors 1b) Compute the difference in the totals that are out of balance. Search the day sheet and patient accounts for that exact amount 1c) If the amount of the error is divisible by 9, there may be an error in transposition of numbers 1d) If the amount of the error is divisible by 2, the amount may have been posted in the wrong column 1e) Check your entries when manually carrying forward previous balances. It is quite easy to carry forward an incorrect amount or to place numbers incorrectly. For example, the number $750 might be carried forward as $75 2) Anyone who has worked with a manual pegboard system can report horror stories of chasing errors around for several days before finding them. It might be one error in one patient's account that creates the havoc. Also, a search for an error can continue at great length even as the assistant keeps seeing and missing the error. Set the problem aside for a bit, or even a day if you are not pressed with month-end billing deadlines. Have another person check for you. Often that individual sees the error in just a few minutes. 3) Errors in an electronic financial system can create almost as much havoc but often can be caught earlier. If all data are entered accurately and kept up to date, an error that occurs when keying in certain data will create a warning notice that indicates the data are incorrect. Computers do not automatically update all information when fees for services are charged, reimbursement adjustments are changed, salaries are increased, or new data from the laboratory or clinical area are determined. Any time there is a person who is entering data into the system, errors can occur. All medical professionals entering any data into the system must be reminded not to rush through the process and to carefully check for accuracy

What is a day-end summary? What are the guidelines for creating a day-end summary?

1) The financial summary at the end of the day is a helpful tool for a quick financial analysis. Computer accounting systems automatically create the day-end summaries in the form of reports. Pegboard systems require the administrative medical assistant to total the summaries that are shown at the bottom of the day sheet. 2) The first section of the day sheet identifies all the financial transactions of the day. The second section includes the month-to-date totals. This is where today's totals are added to the month-to-date totals; this must be in perfect balance. The third section identifies the year-to-date accounts, which includes all accounts to obtain the year-to-date total. A deposit slip included with most systems enables the assistant to verify the cash receipts with the checks received. This is helpful in preparing the day's bank deposit. 3) When the totals do not balance at the end of each day, the medical assistant must begin the search for errors.

What are patient cost factors?

They include administrative costs, such as the cost of billing and collections, personnel costs for clinic staff providing patient care, equipment costs, and costs for clinical supplies.

What are provider cost factors?

They include costs for interpreting tests, diagnosing illnesses, and maintaining professional liability insurance

What are two factors that must be considered when performing a cost analysis for a medical clinic?

Fixed costs and variable costs

What are the two financial statements common to the medical clinic?

1) The income/expense statement: This is the most commonly generated year-end report. The income statement shows the cumulative profit and total expenses by reporting patient income, outside revenue sources, and overhead expenses such as office and medical expenses. Provider's compensation and benefits and employees' compensation, benefits, and withholding taxes can be itemized as well. 2) The balance sheet: Sometimes called the statement of financial condition or statement of financial position, the balance sheet is an itemized statement of the assets, liabilities, and owner's equity of a medical facility as of a specified date. Its purpose is to provide information regarding the status of these basic accounting elements. 2a) The balance sheet is made possible through the double-entry system of accounting because every transaction is recorded by two sets of entries made in a ledger or journal. Increases in assets are recorded as debits; decreases are recorded as credits. Increases in liabilities and owner's equity are recorded as credits; decreases are recorded as debits. 2b) Debit and credit entries to one or more accounts make up the system. In any recording the total dollar amount of the debit entries must equal the total dollar amount of the credit entries. Each ledger or journal entry should have the following elements: -Date of transaction -Journal or ledger account names involved -Dollar amount of the charges -Brief explanation of the transaction

What are the two systems that businesses use to determine how and when it will report income earned?

A business must determine how and when it will report income earned. There are two systems for doing this: the accrual basis and the cash basis

What are the financial ratios that can help evaluate how the practice is doing?

A few financial ratios can help evaluate how the practice is doing. Data from the current year and the previous year's financial statements can be converted into ratios to highlight different financial characteristics. However, ratios should always be viewed in relation to the total financial picture. Ratios are not difficult to calculate, but they can be time consuming when using a manual system. They are quick to create in a computer system because all the data are readily available, already totaled, and sometimes created automatically. It is helpful to understand the concept, however, and not rely too heavily on computer-generated reports. Data that have been entered incorrectly at some point will be reflected in reports generated. The user of accounting software must train his or her mind to think about the sensibility of the report. 1) Accounts receivable ratio: The accounts receivable (A/R) ratio formula measures the speed at which outstanding accounts are paid. The accounts receivable ratio provides a picture of the state of collections and probable losses. The longer an account is past due, the less the likelihood is of successfully making the collection. To calculate turnaround time, you will need to divide the total accounts receivable by the monthly receipts. The goal of an efficient billing and collecting policy should be a turnaround time of 2 months or less. 2) Collection ratio: The collection ratio shows the percentage of our outstanding debt collected. The goal should be a 90% collection ratio. Total receipts divided by total charges gives the unadjusted collection ratio, but adjustments may include federal and state insurance programs (Medicare and Medicaid, Workers' Compensation), managed care adjustments, and any other adjustments as directed by the provider. 3) Cost ratio: The cost ratio formula shows the cost of a procedure or service and can help in determining, for instance, the cost of effectiveness of maintaining a laboratory in the clinic setting. The cost ratio is calculated by dividing the total expenses by the total number of procedures for 1 month.

What are the steps involved in creating the trial balance?

Before preparing monthly statements, a trial balance should be done on the accounts receivable in either a pegboard system or a computer system. The trial balance is created by totaling debit balances and credit balances to confirm that total debits equal total credits. The trial balance will indicate any problem between the daily journal and the ledger. Use the following steps to create a trial balance: 1) Pull all patient accounts that have a balance 2) Total the balance of those accounts 3) Create an accounts receivable total 3a) Enter the accounts receivable at the first of the month 3b) Add the total charges for the month and subtotal 3c) Subtract the total payments for the month and subtotal 3d) Subtract the total adjustments for the month 3e) The final total is the accounts receivable at the end of the month This final total, the end of the month accounts receivable, must be the same as the figure received when adding all the patient account balances. If they do not balance, the error must be found

What are the five bookkeeping and accounting systems?

Medical practices use a variety of methods to monitor their financial accounts and the total financial operations of the business. Although some clinics still use the single-entry bookkeeping and pegboard systems, the majority prefer double-entry or computerized systems, or a combination Financial records should provide the following information at all times: -Amount earned in a given period -Amount collected in a given period -Amount owed in a given record -Where the expenses were incurred in a given period The financial records can show these data as often as you like, usually on a monthly, quarterly, or yearly basis. Comparisons can be made with similar periods. Analysis of the financial data can help to determine if some services are not profitable, whether the practice is experiencing healthy growth, or why a loss might be realized. The accounts receivable and accounts payable data are vital to this information 1) Single entry system: The single entry system has been used in medical practices for many years. This includes a daily journal or log, patient's statements or accounts, ledgers, checks, and disbursement (expenditures) records. Information is first recorded in the journal, which provides a chronological record of financial transactions. Information from the journal is then transferred to the ledger through the process of posting. All amounts entered in the journal must be posted to the accounts kept in the ledger to summarize the results. This system has been used because of its simplicity and inexpensive nature. However, it is difficult to find errors because there are no internal controls, and financial analysis information is inadequate 2) Pegboard system: The pegboard, or "write-it-once", system is easier to use than the single-entry system and has greater internal controls. The pegboard system provides control over collections, payments, and charges. It uses NCR (no carbon requested) forms that are layered or shingled on pegs on the left of the board so that both income and disbursement entries need to be written only once. Many pegboard systems include a charge slip (or encounter form), which simplifies third-party payment processing for both the medical practice and the patients. The charge slip is used to record the input needed during the patient's visit, while serving as the patient's receipt for services performed and fees charged. An advantage of the pegboard system is its accuracy, because data are entered at the time of service and not recopied, so fewer errors can creep in. 3) Double entry system: The double entry system is based on the fact that each transaction has two aspects, that is, a dual effect on the accounting elements. This system is based on the accounting principle that assets and equal liabilities plus owner's equity. Assets= Liabilities + Owner's Equity 3a) Assets are the properties owned by the business (supplies, equipment, accounts receivable, and so on). Liabilities include what is owed to creditors. Owner's equity is the amount by which the business assets exceed the business liabilities. Net worth, proprietorship, and capital are often used as synonyms for owner's equity. 3b) The double-entry system requires that the two aspects involved in every transaction be recorded on each side of the equation and that the two sides always be in balance. Although this accounting system requires time and skill, it provides a comprehensive financial picture and has built-in accuracy controls. It is orderly, fairly simple, flexible, and accurate, making it impossible for certain types of errors to remain undetected for long. For example, if one aspect of a transaction is properly recorded but the other aspect is overlooked, the records are out of balance. This occurrence may be easily discovered and subsequently corrected. 4) Practice management system: The majority of medical practices rely on accounting software packages to prepare financial records such as ledgers and reports, and to retrieve patient information. An increasing number of practices are using financial management software that is part of a practice management (PM) system. PM is a system of computerizing the entire facility and likely includes: -Patient information data and scheduling -Interface with electronic medical records (EMR) and electronic health records (EHR) -Insurance coding and billing; processing claims electronically -Management and human resources; payroll, purchases, personnel records -Bookkeeping and accounting; generation of financial records including business income and expenses A computerized accounting system is most likely to be based on the principles of either the pegboard (write-it-once) or double entry bookkeeping system, or a combination of both. 4a) A computer financial system can be customized to meet the needs of the practice. Most large multi-specialty clinics have a computer system designed particularly for their needs. A practice management system has the capability of including the most common procedure and diagnostic codes within a database to be recalled when completing insurance claim forms. The software will assist in matching the charges with the appropriate diagnosis codes. 4b) A practice management system has the flexibility of assigning codes in other categories to indicate whether a bill has been paid with cash, with a check, or by a third-party payer. Codes may also be assigned to identify the place of service and the professional performing the service. This facilitates the tracking of payments and also allows for the analysis of specific sources that generate income for the practice. Adjustments to reflect discounts or reduced fees may also be entered into the computer. The software is used in the preparation of billing statements, insurance forms, collection letters, and a number of financial ratios and statements to assist in monitoring the practice's financial stability 5) Computer and billing service bureaus: An option for clinics that choose not to purchase accounting software or a practice management system in their practice is to use a computer service bureau for billing purposes and the creation of many financial records. In this case, the clinic provides the data, and the bureau provides basic billing and accounting services, furnishing financial statements, completed insurance forms, payroll materials, and checks. 5a) Service bureaus handle accounts from the medical facilities in one of three ways: -Through the clinic's own computer terminal, online sharing occurs where the clinic is tied directly to the bureau's mainframe computer -Through online servicing, by which the clinic has its own terminal that allows direct communication with the service bureau's computer -Through off-line batch processing, where the medical assistant or bookkeeper sends daily batches of data to the bureau to process 5b) Many facilities, however, prefer to have their own computerized financial or practice management system because outsourcing computer services can compromise patient confidentiality and limit control over computer usage. A proper contract should be negotiated and signed with any computer and billing service bureau to ensure confidentiality, HIPAA compliance, and strict privacy of all patient information