This paper examines how Generally Accepted Accounting Principles (GAAP) apply to both for-profit and not-for-profit healthcare organizations in the United States. It outlines core GAAP principles—including the entity assumption, revenue recognition, matching, cost, time period, and full disclosure principles—and explains how each functions within the healthcare context. The paper highlights the unique challenges healthcare entities face, particularly the delay between service delivery and payment due to insurance billing cycles, retroactive adjustments, and the need for complex estimates. It concludes by emphasizing GAAP's ethics-driven, principles-based approach and the overriding importance of the materiality principle in ensuring honest financial reporting.
Within the United States, all businesses that keep financial records must adhere to Generally Accepted Accounting Principles (GAAP), including both for-profit and not-for-profit healthcare entities. "GAAP is not a single accounting rule, but rather the aggregate of many rules on how to account for various transactions" (Kramer & Applebaum, 2013).
The first two principles of GAAP are that "financial records must be separately maintained for each economic entity" and that "an economic entity's accounting records include only quantifiable transactions. Certain economic events that affect a company, such as hiring a new chief executive officer or introducing a new product, cannot be easily quantified in monetary units and, therefore, do not appear in the company's accounting records" (GAAP, 2013, Houghton Mifflin Harcourt). These details may be included as qualitative data and, in fact, may be necessary to insert as footnotes to reports to investors in order to give a full financial picture of the entity's future financial health.
Finally, all entities, regardless of industry type, are recorded according to the going concern principle, which assumes that the entity will exist indefinitely (GAAP, 2013, Houghton Mifflin Harcourt).
Some unique characteristics of financial reporting in healthcare emerge when creating a report compliant with GAAP. For example, in most healthcare organizations there is a delay between the rendering of services and full payment, because patients use health insurance to pay for their care. "Making matters more complicated, many payments are subject to billing reviews, retroactive adjustments or other queries which may occur over a considerable period of time," even months or years (Kramer & Applebaum, 2013).
Thus, healthcare organizations must make estimates "in order to record revenue and related patient receivables in the financial statements. The basis for such estimates may range from relatively straightforward calculations to highly complex judgments based upon assumptions about future events and decisions" (Kramer & Applebaum, 2013).
This reliance on estimates may appear to conflict with some of the basic principles of GAAP. The revenue recognition principle holds that "revenue is earned and recognized upon product delivery or service completion, without regard to the timing of cash flow," while the matching principle states that "the costs of doing business are recorded in the same period as the revenue they help to generate." Nevertheless, estimation is an inevitable necessity given the economic structure of the healthcare environment (GAAP, 2013, Houghton Mifflin Harcourt).
There is also the cost principle, which suggests that assets are entered at their cost at the time of the exchange, even if they later appreciate or are affected by financial, technological, or environmental pressures. Although changes are coming to the industry through new healthcare legislation, the payment insurance gap will continue. GAAP reflects accrual basis accounting rather than cash basis accounting — a method that "captures the financial aspects of each economic event in the accounting period in which it occurs, regardless of when the cash changes hands" (GAAP, 2013, Houghton Mifflin Harcourt).
"Reporting periods and lawsuit disclosure requirements"
"Materiality principle and ethics-driven financial reporting"
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