Practice Manager’s
Bootcamp:
Basic Accounting, Internal
Controls & Performance
Indicators
Jeffrey W. Dudley, CEO
Sacramento Ear, Nose and Throat
Disclaimer

This course is intended as an orientation to basic
accounting principles in general business terms.

This course is not intended to give accounting, billing, legal,
marital or tax advice.

Advise for accounting, billing, legal, marital and tax matters
pertaining to your business should be sought from the
appropriate professional familiar with your situation.
Basic Accounting Objectives

Review basic accounting concepts, terms, equations

Review Internal Controls concepts

Review Financial indicators

Sample physician reporting

Q and A
Generally Accepted Accounting
Principles (GAAP)

Recognized standards used for financial statement
reporting

Provides uniform methods and vocabulary

Enforces the full disclosure reporting

Measure profits and determine assets and liabilities
Basic Accounting Equation
Debit
Credit
Liabilities
Assets
Debit
Increase:
+put values
in debit side
Decrease: puts values
in credit side
Credit
Owner’s
Equity
Increase:
+put values
in credit side
Decrease: put values in
debit side.
Cash Basis
Cash Basis

Follows the money

Income recognized when
received

Expenses recognized when paid

Income taxes are typically paid
on a cash basis

Used by smaller practices for
overall accounting
Cash Basis vs. Accrual Basis
Cash Basis
Accrual Basis

Follows the money


Income recognized when
received
Income is recognized in the
period it was earned

Expenses are recognized when
incurred

More complex

Most accurate in depicting
current financial status

Expenses recognized when paid

Income taxes are typically paid
on a cash basis

Used by smaller practices for
overall accounting
Assets

Resources owned by the practice

Current = Convertible within a year

Long term = All others
Assets

Accounts Receivable = Money owed to practice

Prepaid Expenses = Insurance, Maintenance

Fixed Assets = Durable items
 Computers,
equipment, furniture, leasehold
improvements
 Most
decrease in value and subject to depreciation
Liabilities

Accounts Payable = Money owed by practice to its
suppliers (CL)

Taxes Payable (CL)

Accrued Revenue (CL)

Accrued retirement funding (CL)

Notes payable (LT)
Direct Cost

Definition: Material, labor and expenses that
relate directly to a specific product or service.

In the Medical Office: Labor, rent, depreciation,
medical supplies, cost of goods sold, maintenance
for your medical equipment are all examples in
the medical office.
Terms -Indirect Cost

Incurred in support areas

QA, Medical Records, IT, Billing, Finance

Housekeeping, Building Maintenance
Terms - Fixed Cost

Remains constant regardless of volume

Rent

Property taxes

Insurance expense

Licenses

Salaries

Depreciation
Terms - Variable Cost

Variable with volume

Tests: Lab, Allergy

Allergy injections

HA sales

Supplies: Medical, allergens, hearing aids

Commissions
Terms - Step Fixed Cost

Fixed over a range of activity

Increases when activity level goes up

Think stair step

Examples: Add physician, clinical support staff
Cost Behavior Pattern Examples
Type of Expense
Cost Behavior
Physician
Fixed
Physician-employee
related expenses
NPP
Fixed
NPP – Employeerelated expenses
Ancillary staff
Fixed
Other employeesalaries
Temporary employee
salaries
Fixed
Step-fixed (personnel are hired in steps)
Fixed
Fixed
Cost Behavior Pattern Examples
Type of Expense
Administrative and
office expense
Malpractice insurance
Cost Behavior
Fixed
Fixed
Drugs
Variable
Medical supplies
Variable
Lease/Rent
Utilities
Property taxes
Fixed
Semi-fixed (majority is fixed, a portion may be variable depending
on use)
Fixed (amounts determined for a year)
Cost Behavior Pattern Examples
Type of Expense
Insurance
Depreciation
Purchased services
Non-operating
expenses
Interest
Cost Behavior
Fixed
Fixed (costs related to capacity rather than level of activity)
Fixed (will depend on factors other than activity level)
Fixed
Fixed
Terms
Period: The specific amount of time covered by a financial
statement.
Revenue is an increase in assets or decrease in liabilities resulting
from the operating activities of an entity.
Revenues: sources of incoming receipts such as fees for services
rendered
Revenue Recognition: When revenue is earned -- not based on
receipts.
Terms
Operating
profit: Gross profit minus operating expenses
Other
income: Income from sources such as gain on sale
of an asset or interest income
Net
income/loss: Revenues minus operating expenses plus
or minus other income/expenses – this is the “bottom line.”
The
great interest of partners in most practices is how
much of this net income is available for their paycheck.
Terms
General Journal: A book of original entry to record accounting
transactions; every business transaction that is monetary; process of
recording known as a journal entry.
General Ledger: A complete book of accounts of a business.
Long-term liabilities are debts that will require more than one year
to pay back. These include mortgages and term notes.
Matching Process: Reporting of revenues and expenses in the
proper period.
Operating expenses: such items as salaries, payroll taxes, employee
benefits, insurance, rent, depreciation and vehicle expenses
Terms - Depreciation

Non-cash expense that reduces the value of a tangible
asset over time

Accounts for wear and tear, age, obsolescence,
replacement

Most tangible assets depreciate and must be replaced

Real property, equipment, vehicles are examples

Accounting mechanism for recognizing the declining value
of such assets over time, lowers a company’s gross profit,
thereby reducing its taxable income.
Basic Accounting Equation
Debit
Credit
Liabilities
Assets
Debit
Increase:
+put values
in debit side
Decrease: puts values
in credit side
Credit
Owner’s
Equity
Increase:
+put values
in credit side
Decrease: put values in
debit side.
How do we record activity?
Double-Entry Accounting System

The technique is called a double-entry recording process. To understand it
better we are introducing a T account**Two important rules about the doubleentry recording system:

Assets = Claims (Liabilities and Owner's Equity)

Total Debits = Total Credits. Double-entry recording system provides for
the equality of total debits and total credits.

T account is an individual accounting record that shows information about
increases and decreases in one balance sheet or income statement account.
It is so called because it has a form of the letter T.

Debit entries increase asset accounts, and decrease liability
and equity accounts.

Credit entries increase liability and equity accounts, and
decrease asset accounts.

An easy way to remember these rules is to learn that
increases are posted on the outside (see plus signs above)
and decreases are posted on the inside (see minus signs
above). That rule holds true for asset as well as liability
and equity accounts.
The Journal Entry Box
Assets:
(Cash, AR, Fixed Assets)
=
Liabilities + OE:
(Payables, Ret Earnings)
Increase
Left
Right
Decrease
Right
Left
Financial Statements
Balance
Income
Cash
Sheet
Statement
Flow Statement
Retained
Earnings
Financial Statements
Balance Sheet
Assets:
Current, Fixed and Other
Liabilities:
Current and Long Term Cash
Flow Statement
Net
Worth (or Equity)
Assets
= Liabilities + Owner Equity
Balance Sheet
Dr. Smith Practice
Balance Sheet
Period Ended 2012
Assets
Cash
Accounts Receivable
Total Assets
Liabilities
Salaries Payable
Total Liabilities
$ 4,500
800
5,300
500
500
Equity
Contributed Capital
Retained Earnings
Total Equity
3,500
1,300
4,800
Total Liability and Equity (Claims)
5,300
Retained Earnings

Retained Earnings (RE) =
Beginning RE + Net Income - Dividends
Income Statement
Income
statements and balance sheets describe the
financial situation as it actually exists.
Budgeted
income statements and budgeted balance
sheets projects what the financial situation will be during
some future time.
Budgeted
income statement will include projections about
revenues, salaries, total operating expenses, gross profit,
total operating profit and net income.
Sample Income Statement
Chart of Accounts

A listing of the
account names and
numbers found in
the accounting
system to record
entries.
CHART OF ACCOUNTS
Account ID
Description
Type
1010
1020
1040
1060
1080
1090
1150
1310
1320
1330
1340
1410
1530
2021
2022
2023
2026
2070
2080
2505
2525
2545
3100
3200
4000
4050
4060
6010
6020
6030
6040
6050
6060
6171
6172
6173
6174
6272
6273
Petty Cash
Cash-Operating
Cash-Payroll
Cash Account
Bank Operating Acct
Bank Payroll Acct
Prepaid Taxes
Office Equipment
Medical Equipment
Leasehold Improvements
Software
Accumulated Depreciation
Prepaid Expenses
FICA & Medicare Payable
Federal Withholding Payable
State Withholding Payable
Unemployment Payable
401K contributions--employee
Current Portion Long Term Debt
Line of Credit
Note Payable Bank
Construction Loan
Capital Stock
Treasury Stock
Fees
Hearing Aid Sales
Miscellaneous
Advertising
Bank Charges
Collection Expense
Depreciation
Medical Supplies
Office Supplies
Insurance-Employees
Insurance--Physicians
Disability-Physicians
Disability--Employees
Payroll--Employees
Payroll--Physicians
Cash
Cash
Cash
Cash
Cash
Cash
Other Current Assets
Fixed Assets
Fixed Assets
Fixed Assets
Fixed Assets
Fixed Assets
Other Assets
Accounts Payable
Accounts Payable
Accounts Payable
Accounts Payable
Other Current Liabilities
Other Current Liabilities
Other Current Liabilities
Long Term Liabilities
Long Term Liabilities
Equity-does not close
Equity-does not close
Income
Income
Income
Expenses
Expenses
Expenses
Expenses
Expenses
Expenses
Expenses
Expenses
Expenses
Expenses
Expenses
Expenses
Cash Flow Statement



Operating activity

Cash Flow from Operating Activities can be created by:

Net Profit

Depreciation (Expense or value of asset over its useful lifetime)

Status of Prepaid Expenses (Increase/Decrease)

Status of Accounts Payable (Increase/Decrease)
Investing activity

Cash Flow from Investing Activities can be created by:

Purchase of building and equipment

Sale of building and equipment

Increase/Decrease in investments
Financing activity

Cash Flow from Financing Activities can be created by:

Repayment of loans

Distribution to physician owners

Borrowing
Cash flow from operating expenses +
investment activities + plus financing activities
= net increase (or decrease) in cash
Calculating operating cash flow from
net income
Financial Controls


Internal control is a process, which is set by an
organization’s governing body, management and
other personnel, to provide reasonable assurance
that objectives are achieved in the following areas:
 Effectiveness
and efficiency of operations
 Reliability of financial reporting
 Compliance with applicable laws and regulations
Financial Controls


Internal control consists of five interrelated
components derived from the way management
operates a business. The five components are:
 Control
environment
 Risk assessment
 Control activities
 Information and communication
 Monitoring
Financial Controls


Good or Bad?
Same person handles cash receipts, has access to accounts
receivable records, and makes the bank deposit.
Financial Controls


Good or Bad?
The person who writes checks for payments also reconciles
the bank statements.
Financial Indicators
Practice Performance
Total Gross Charges per FTE Physician =
Gross fee for service Charges / Total FTE Physicians
Provides an overall picture of the financial productivity of the group
Financial Indicators
Practice Performance
Total Net Revenue per FTE Physician =
Total Medical Revenue / Total FTE Physicians
Provides important measure of the financial stability of the group
Way to compare relative productivity and profitability between practices
Financial Indicators
Practice Performance
Gross Collection Ratio =
Net Fee for service or Collections
Gross Fee for service Charges
Provides the collection margin for the group or
the amount of work that needs to be done relative to
the actual revenue collected
Financial Indicators
Operating Cost
Total Operating Cost as a Percent of Medical Revenue =
Total Operating Costs / Total Medical Revenue x 100
Identifies the group’s overhead ratio or the percentage of revenue
that is spent to cover operating costs.
Subtracted from 100 it represents the amount of money available
for physician compensation or reinvestment in the practice.
Financial Indicators
Accounts Receivable
Accounts Receivable per FTE Physician =
Accounts Receivable / Total FTE Physicians
Provides an average measure of the group’s charges that are
outstanding per FTE physician. Can assists with identifying potential
problem areas in the billing and collection procedures.
Financial Indicators
Accounts Receivable
Adjustments as a percent of Gross Charges=
Adjustments / Gross Charges x 100
Financial Indicators
Accounts Receivable
Bad Debts due to fee for service as a percent of gross fee
for service charges =
Bad Debts due to fee for service activity / Gross Charges x
100
Identifies the percentage of total gross charges that won’t be
collected for services rendered. Identifies the practice’s
ability to collect for services rendered.
Financial Indicators
Accounts Receivable
Adjusted Collection Ratio =
Net revenue or Collections / adjusted charges
Provides effectiveness of ability to collect adjusted gross
charges.
High ratios indicate high effectiveness and high efficiency
and low value indicate low effectiveness and low efficiency.
Financial Indicators
Accounts Receivable
Accounts receivable analysis
Two types of reports help analyze and track accounts
receivable balances.
Listing all accounts and their balances by type of payer
Listing the account balances by aging of each payer balance
(0-30 days, 31-60 days, 61-90 days)
Questions?
Thank you!