Financial and Practice Management
Learning Objectives
1. Define, spell, and pronounce the terms listed in the vocabulary.
2. List the four items all financial records should show at any given time.
3. Describe how to establish and maintain a petty cash fund.
4. Differentiate between accounts payable and accounts receivable.
5. Explain the difference between a single-entry and a double-entry accounting system.
6. Explain the importance of a trial balance.
7. Describe common periodic financial reports.
8. Explain how to process an employee payroll accurately.
9. Explain the purpose of Form W-4.
10. State the types of employment records required by the Internal Revenue Service (IRS).
11. Discuss the basis for the withholding amounts taken from employees’ earnings.
12. Explain the requirements of the Federal Insurance Contributions Act (FICA).
13. Discuss the importance of setting a budget each fiscal year.
Vocabulary
accounts payable Debts incurred and not yet paid.
accounts receivable Amounts owed to the physician.
accounts receivable trial balance A method of determining that the journal and the ledger are in balance.
accrual basis of accounting Method of accounting in which income is recorded when earned and expenses are recorded when incurred.
admonition Counsel or warning against fault or oversight.
balance sheet A financial statement for a specific date that shows the total assets, liabilities, and capital of the business.
bookkeeping The recording of business and accounting transactions.
cash basis of accounting A method of accounting in which income is recorded when received and expenses are recorded when paid.
controls A standard of comparison to make sure answers obtained are accurate.
disbursements journal A summary of accounts paid out.
entry A record or notation of an occurrence, transaction, or proceeding.
invoice A paper describing a purchase and the amount due.
liabilities Things that are owed; debts.
petty cash fund A fund maintained to pay small, unpredictable cash expenditures.
statement A request for payment.
statement of income and expense A summary of all income and expenses for a given period.
subsidiary Supporting other documents or records.
trial balance A method of checking the accuracy of accounts.
Scenario
Brenda Newman is the office manager for Dr. Susan Wilkins, a neurologist who is beginning her second year of practice. Dr. Wilkins is financially savvy and takes care with the money she has invested in her business. She encourages her employees to plan for the future and offers them a retirement plan, in addition to opportunities for investing in mutual funds through payroll deduction. Her accountant, Grant Schmidt, assists Dr. Wilkins with the financial aspects of her practice and is always willing to counsel the employees of the clinic about finances.
Mr. Schmidt has taught Brenda several methods of keeping track of the practice’s finances. Brenda is interested in learning more about general accounting rules and bookkeeping. She is able to perform computerized accounting duties and is also able to use a pegboard system. She works with patients when they need to make payment arrangements and has an excellent collection ratio.
Dr. Wilkins is cost conscious and does not order random supplies and equipment. Instead, she and Brenda plan the inventory for a 6-month period and order supplies every 6 months. By ordering in precise amounts, Dr. Wilkins saves money and uses the extra funds for staff development events and seminars. Each month, the budget is printed and reviewed during a staff meeting to ensure that the office is on track with expenses.
The team effort involving Dr. Wilkins, Brenda, and Mr. Schmidt results in a balanced budget for the clinic, and subsequently the staff is able to enjoy more benefits and perks.
While studying this chapter, think about the following questions:
A physician’s business records are the key to good management practice. Physicians need and appreciate medical assistants who can keep accurate financial records and can conduct the administrative side of the practice in a businesslike fashion. Financial records that are complete, correct, and current are essential for:
• Prompt billing and collection procedures
• Professional financial planning
• Accurate reporting of income to federal and state agencies
More than half of today’s physicians run independent practices. According to CNNmoney, shrinking insurance reimbursements, changing regulations, rising business and drug costs are among the factors preventing many from keeping their practices afloat. But some experts counter that doctors’ lack of business acumen is also to blame. Unless the physician and staff stay abreast of regulations affecting finances, the physician may find his or her practice failing.
What is Accounting?
Accounting is a system of recording, classifying, and summarizing financial transactions. Bookkeeping is the recording part of the accounting process. Bookkeeping must be done daily. In a small practice, it is the responsibility of the administrative medical assistant; in a larger practice, it is done by the office manager or financial manager. Summaries are prepared and personal and business tax returns are filed with the Internal Revenue Service (IRS).
Accounting Bases
Two general bases, or methods, of accounting are used: the cash basis and the accrual basis. Most physicians use the cash basis of accounting, which means that charges for services are entered as income when payment is received, and expenses are recorded when they are paid. Merchants, on the other hand, generally use an accrual basis of accounting. Income is considered earned when services have been performed or goods have been sold, even though payment may not have been received. Expenses are recognized and recorded when incurred, even though they have not been paid.
Financial Summaries
The financial records of any business should show the following at all times:
The accountant can prepare monthly and annual summaries from the daily entries that provide a basis of comparison for any given period with another, similar period. Periodic analyses of financial records result in improved business practices, better time management, curtailment or elimination of unprofitable services, and better budgeting of expenses. With the appropriate software, these analyses can be done on the computer. The medical assistant may see notations such as AR/AP, which stand for accounts receivable (Procedure 24-1) and accounts payable (Procedure 24-2).
24-1
Critical Thinking Application
The Rules of Bookkeeping
Bookkeeping has many rules that the medical assistant must follow. First, use good penmanship so that the records are clearly legible, even years later. Use the same pen style and type of ink consistently. Keep columns of figures straight and write well-formed figures (a careless 9 may look like a 7; an open 0 may resemble a 6). Carry decimal points correctly. Ask the physician if any questions arise about bookkeeping issues (Figure 24-1).
Enter all charges and receipts immediately in the daily record or journal. Write a receipt in duplicate for any currency received. Writing receipts for checks is optional, but a consistent pattern should be followed. Post all charges and receipts to the patient ledger daily. Checks should be endorsed for deposit as soon as they are received. The petty cash fund should be used to pay for small, unpredictable expenses. Pay all other expenses by check. A cancelled check is the best proof of payment. Bills should be paid before their due date after they have been checked for accuracy. Place the date of payment and the check number on paid bills.
Do not erase, write over, or blot out figures. If an error is made, a straight line should be drawn through the incorrect figure and the correct figure written above it. Bookkeeping procedures are not complicated, but they do require concentration to prevent errors. There is no such thing as almost correct financial records. Either the books balance, or they do not balance. The bookkeeping is either right or wrong.
Kinds of Financial Records
Daily Journal
The daily journal is the chronologic record of the practice (i.e., the financial diary). The day sheet is the daily journal for practices that use a manual pegboard system. Although more practices use computerized systems, some still use a manual pegboard; however, using a manual system helps the medical assistant to understand the theory of accounting in the medical office. All information about services rendered, charges, and receipts first is recorded in the daily journal. It is important to record every transaction.
The practice may earn income from sources other than the professional services rendered in and out of the office. Such sources include rentals, royalties, interest, and so forth. If the physician owns the entire building and rents a few offices to other professionals, he will have to claim rental income on his tax returns. Additionally, if he has published any textbooks or has other royalty income, that will also need to be listed on his annual returns. Usually a special place is provided in the journal for such income. Any income that is not practice related should be recorded separately from patient receipts.
Checkbook
Receipts usually are deposited in the checking account, and a record of the deposit is entered in the journal and on the check register. A copy of each deposit slip should be kept with the financial records. Bills usually are paid by check or through online bill paying services, and a record of the payment is entered on the check stub and in the disbursements section of the daily journal.
Disbursements Journal
In simplified accounting systems in which manual posting is used, the disbursements journal usually consists of a section at the bottom of each day sheet and a check register page at the end of each month, plus monthly and annual summaries. It must show the following:
When a computer system is used to post disbursements, the cash or check payments screen is used. Payment information is entered, and the computer prints the check, or the information is entered after the check has been manually prepared.
Petty Cash Records
A petty cash fund and voucher system should be established to take care of minor unpredictable expenditures, such as postage due, parking fees, small contributions, emergency supplies, and miscellaneous small items. In the average facility, $25 to $50 is sufficient for the petty cash fund. If a larger sum is available, the tendency is to pay too many bills out of petty cash instead of writing a check.
When the check for this fund is exchanged at the bank for small bills and coins, the money is placed in a cashbox or drawer that can be locked or kept in the safe at night. Only one person should be in charge of the petty cash fund. This person must be able to account for the full amount of the fund at any time.
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Critical Thinking Application
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