Healthcare is continually evolving and has become a business and an economic force in current society. Historically, stakeholders such as physicians and other health care professionals are adept at making clinical and health-related decisions. However, they often lack the ability to make informed financial decisions. Many have come to realize financial criteria and cost-effective health care delivery is paramount to the success of modern healthcare systems. Therefore, stakeholders recognize the need and relevance of financial knowledge to make informed decisions (Cleverly, Jones & Cleverly, 2011). Concept and purpose of Generally Accepted Accounting Principles
Organizations, including health care facilities, employ accountants to oversee the financial endeavors of the organization. Generally accepted accounting principles are rules created by the Financial Accounting Standards Board to regulate financial accounting and prepare the organization’s financial statements (Finkler, Kovner & Jones, 2007). Generally accepted accounting principles or GAAP is widely used in the health care industry(Pounder, 2011). The principles provide industries with a framework for tracking and monitoring the organization’s financial circumstances. GAAP helps in preparing the four most important financial statements relevant to the facility’s economic well-being. The financial statements are balance sheets, statements of operation, cash flow, and change in net assets (Cleverly, Song & Cleverly, 2011). Routine auditing evaluates the organization’s financial system and determines compliance or non-compliance with GAAP (Finkler, Kovner & Jones, 2007).
Among the various principles that comprise GAAP are:
• Entity concept: the entity is the organization or individual financial statements are prepared for (Cleverly, Jones & Cleverly, 2011). Healthcare facilities are often defined as an entity, particularly when they are large medical