Financial Reporting and The Medical Practice
Businesses keep books to ascertain whether or not they are making a profit or a loss. To physically view this information, reports need to be produced in either soft copy or hard copy so that they can be analysed and shared.
The advantage of computer accounting applications is that reports can be produced quickly without the time consuming job of gathering, summarising and presenting this information.
As the majority of the practice management software solutions available in Australia are not fully-integrated accounting packages, data has to be transferred to a third‑party accounting solution to get a good picture of how the business is functioning. This can be quite a tedious and expensive exercise, particularly if you are managing stock movement as well.
However, thanks to our having to do Business Activity Statements (BAS), this data is at least transferred more often than prior to the year 2000. Back then, you were lucky to know how your business was going financially once a year when your accountant lodged your returns to the ATO.
Most medical practices lodge their BAS each quarter and therefore may only get an indication of how they are performing financially at that time.
Clearly it is far better to have your finger on the pulse of your business every day, so that you can make informed decisions within a reasonable time:
- Autoclave breaks down Can I afford a new one now or should I just pay to have it fixed?
- I need to upgrade the Server Is this in my budget?
- I need a weeks break Can I afford to be away?
- Increased income What areas of the business need improvement?
- Current practice management solution not meeting business needs Can I afford to change to another?
It is important that the bookkeeper understands what they are trying to achieve and why.
All transactions are recorded for the financial period, usually a fiscal year, and a number of reports are extracted from these records. It is from these reports that the viability of the business can be seen as each transaction is recorded in monetary terms.
Whether it is a receipt of twenty cents or a payment of four hundred and fifty dollars, a summary of every transaction is included in the final reports for that particular financial year. These transactions result in a list of what you own (Assets), less what you owe (Liabilities), leaving a value of what you are worth (Capital or Equity).
Apart from government regulations (the Australian Taxation Office, the Australian Accounting Standards Board AASB which governs the practice of accounting and issues approved accounting standards), the main reason for the keeping of books is to ascertain whether or not the business is making a profit or a loss.
The Australian Accounting Standards Board and the Australian Accounting Research Foundation (AARF) have published a series of Statements of Accounting Concepts. These statements are accounting guidelines for people and organisations and are viewed as being part of a set of interrelated concepts (the accounting conceptual framework).
Detailed below are three reports: The Trading Statement, the Profit and Loss Statement and the Balance Sheet for a Medical Practice. The registered business name of the Practice is A Bouncing Medical Practice. These financial reports were produced at the end of the fiscal period 30 June 20xx. However, many organisations produce these reports on a more regular basis.
The Trading Statement
A Trading Statement is illustrated below:
The Trading Statement is a financial report that is generated at a specified time, usually the end of a financial period.
The Trading Statement details the gross profit of a business by totalling all income and deducting from this the cost of sales (e.g. surgical purchases, products). It is common for a sole trader to include this report with the Profit and Loss Statement. It is then referred to as the Trading and Profit and Loss Statement.
The Profit and Loss Statement
The Profit and Loss Statement is a financial report that is generated at a specified time, usually the end of a financial period.
The Profit and Loss Statement calculates the net profit generated from a business by taking the gross profit and adding any other income, such as interest received or commission received, and deducting expenses, such as advertising, bank fees and telephone bills.
A Profit and Loss Statement is illustrated below:
The Balance Sheet
The Balance Sheet is a financial report that is generated at a specified time, usually the end of a financial period. The Balance Sheet details what a company owns (Assets), what a company owes (Liabilities), and what a company is worth (Capital or owners Equity).
It is the Balance Sheet that summarises the transactions for the financial period and it is often referred to as a Statement of Financial Position.
A Balance Sheet is illustrated below:
The Chart of Accounts
An account is a detailed listing of events that affect one particular item. Each account is addressed by the name of the event and a number (account code).
If keeping accounts on a manual system, they are written in a book known as the General Ledger, sometimes referred to as a Book of Accounts. Each account is usually allocated one page in the book.
A list of these accounts is referred to as a Chart of Accounts and can be thought of as the index of the General Ledger. Listed in the chart of accounts are all the accounts as they appear in the General Ledger. They are grouped into sections, numbered, and placed in alphabetical order. Accounts can be added to and deleted (if not active) from the Chart of Accounts as required.
The Accounting Cycle
The image at the bottom of this page refers to the Accounting Cycle.
Transactions take place and are supported by documentation. Details of these transactions are then recorded into either Journals (daybooks) if the bookkeeping is being maintained manually, or keyed into the relevant module of an accounting package if the bookkeeping is being maintained on a computer.
These daybooks or modules are then sorted (classified) by transferring the totals to the General Ledger. Some accounting packages give you the option of transferring each transaction to the General Ledger, not just the totals. Other subsidiary ledgers may be kept such as a Debtors Ledger or a Creditors Ledger. At times specified by company policy, the accounts in the General Ledger are summarised in the reports discussed previously in this article, namely:
- Trading Statements
- Profit and Loss Statements
- The Balance Sheet
In the next edition of Pulse+IT we will look at reporting GST in the medical practice, and interim reports used for business analysis.
Posted in Australian eHealth