the “abc’s” of accounting

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The “ABC’s” of Accounting

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Page 1: The “ABC’s” of Accounting

The “ABC’s” of Accounting

Page 2: The “ABC’s” of Accounting

A Special Thank You to:

Dr. David M. Yousem, M.D., M.B.A.Professor, Department of RadiologyVice Chairman of Program DevelopmentDirector of Neuroradiology

Johns Hopkins Hospital

for allowing the use of his material/content in this presentation

Dr. Yousem’s online lecture series can be viewed at:http://webcast.jhu.edu/mediasite/Catalog/pages/catalog.aspx?

catalogId=7e18b7d5-9c63-487e-aaf1-77a86f83b011

Dr. Yousem’s project was funded through an RSNA Educational Grant

Page 3: The “ABC’s” of Accounting

Accounting Overview

• Regulatory Agencies• The Balance Sheet• Income Statement• Statement of Cash Flows• Budgets• Accounting Entities• Insurance

Page 4: The “ABC’s” of Accounting

REGULATORY AUTHORITIES

• Financial Accounting– Financial Accounting Standards Board (FASB)

• Tax Accounting– Internal Revenue Service (IRS)

Page 5: The “ABC’s” of Accounting

Financial Accounting Standards Board (FASB)

• Has authority to set financial accounting standards– Recognized by:

• Securities & Exchange Commission (SEC)• American Institute of Certified Public Accountants

(AICPA)

• Standards = Generally Acceptable Accounting Principles (GAAP)

Page 6: The “ABC’s” of Accounting

GAAP Hierarchy

• A. Statement of Financial Accounting Standards (FASB)– Greatest authority

• B. Technical Bulletins (FASB)• C. Consensus Position. Emerging Issues Task Force (FASB)• D. Accounting Interpretations (FASB)• E. Statement of Financial Accounting Concepts

– Least authority

Page 7: The “ABC’s” of Accounting

Bookkeeping ≠ Accounting

• Bookkeeping– Chronological documentation of economic events for later

use by an accountant.

• Accounting– Integrating and “making sense” of bookkeeping information

and preparation of various financial reports to assess financial performance.

Page 8: The “ABC’s” of Accounting

THE BALANCE SHEET

• = Statement of financial condition• Composed of two columns that balance and equal each other:

Assets = Liabilities + Retained Earnings• Assets and Liabilities are each divided into two sections:

– Current• “An asset or liability that can be liquidated or will come

due in the next 12 months.”– Noncurrent

• Same as current, except ranges past the next 12 months.

Page 9: The “ABC’s” of Accounting

Importance of Ratios

• Working Capital= Current Assets ÷ Current Liabilities– Ideally a ratio of 2:1 or higher is sought– Measure of how liquid a company is…

• The more money and less liability ~ the better off the company

Page 10: The “ABC’s” of Accounting

Assets (Cash + Accounts Receivable + Inventory)

• Quick Assets Ratio (Asset Test Ratio)= (Current Assets-Inventories) ÷ Current Liabilities– Important ratio when a company has a lot of inventory

included on the balance sheet– Inventory is the least liquid current asset

• Accounts Receivable– Amounts due from patients/insurance companies

• Other assets– Deferred: Payments now for next year’s expenses– Intangible Assets– Fixed Assets: Property, plant, and equipment

Page 11: The “ABC’s” of Accounting

Liabilities

• Debt + Accounts Payable + Accrued Expenses + Stockholders Equity– Debt

• Typically, real estate and equipment purchases in radiology practices

– Accounts Payable• Amounts owed to vendors/suppliers

– Accrued Expenses• Items expensed but not yet paid for.

– e.g. Taxes, Salaries, Legal Fees

Page 12: The “ABC’s” of Accounting

INCOME STATEMENT

• Summary of income and expense items for a given period of time– Contrary to Balance Sheet, which looks at a specific date

• Bottom Line (Profit)= (Income – Expenses)– Other names:

• EBT (Earnings before taxes)• EBITDA (Earnings before interest, taxes, depreciation, &

amortization)

Page 13: The “ABC’s” of Accounting

STATEMENT OF CASH FLOW

• Summary of inflow and outflow during a specified period

• Critical to assessing the immediate needs of the company– Primarily relating to liquid assets

• Balance Sheet + Income Statement + Statement of Cash Flow– Basic components to financially evaluate a business

Page 14: The “ABC’s” of Accounting

BUDGETS

• Important to establish benchmarks for a company to compare actual performance

• “Variances” = deviations in the budget• “Red Flags” = Large deviations/fluctuations• Budgeting for internal use only• Need both annual and long-term budgets

– Useful models:• Rolling forecasts- prior year plus percentage increase

– Allow performance evaluation of different segments within the company

Page 15: The “ABC’s” of Accounting

BUDGETS

• Profit Margin = Operating Income ÷ Revenues• Most budgets forecast to operating income (profit)

– Also called EBIT (Earnings before interest and taxes)• Revenue is proportional to volume • Variable expenses change in proportion to revenue– Fixed expenses to be considered:

– Rent, Salaries, Benefits, Insurance• Depreciation

– Must be incorporated in budget, with a tax benefit if deducted on accelerated basis

– Based on IRS general depreciation systems

Page 16: The “ABC’s” of Accounting

ACCOUNTING ENTITIES

• Three entities in radiology private practice– C corporation– Partnership/pass-through entity

• Partnership• S corporation• Limited liability company (LLC)

– Sole proprietorship

Page 17: The “ABC’s” of Accounting

C Corporation

• Regular corporation– File annual income tax – Pay tax on taxable income

• Note: THE STOCKHOLDERS PAY ANOTHER TAX ON DIVIDEND DISTRIBUTIONS (Double Taxation)

Page 18: The “ABC’s” of Accounting

Partnership/Pass-through Entities

• File annual tax returns, but do NOT pay income taxes

• Each return issues a Form K-1 to each investor – Reports the percentage share of each income & deduction

for each investor

• Investors report their share of income and deductions on their respective tax returns

• Essentially, taxation only at investor level

Page 19: The “ABC’s” of Accounting

S Corporation

• Must meet certain criteria– Can only have a single class of stock (no common or

preferred stock)– 75 or less stockholders– Shareholders have limited liability

• Only their investment is at risk• If sued, the assets of the corporation, not the investors’,

are available for collection.

Page 20: The “ABC’s” of Accounting

Partnership

• Similar to S Corporation• Any number and types of partners• General Partnership

– All partners are general and all are fully liable for partnership debts

• Partners may have to contribute additional assets to satisfy debts

• Limited Partnership– One general partner and numerous limited partners

• Limited partners liable for debt only up to their investment

Page 21: The “ABC’s” of Accounting

LLC – Limited Liability Companies

• Hybrid of C corporation & partnership• Can be taxed as either C corp or partnership if >1 partner• If one member only, can be taxed as C corp or as “disregarded entity”

– Report income and deductions on personal tax return• No Form K-1

• Members liable only for their extent of their investment– Similar to S corp

• No requirement that member has general liability for LLC debts

Page 22: The “ABC’s” of Accounting

State-dependent restrictions

• In many states, professional practices not allowed to organize as LLC’s, partnerships, or C corporations– Separate entities

• Professional Associations (PA)• Professional Corporations (PC)• Professional Limited Liability Companies (PLLCs)

– Must be licensed by state authority (medical board)– Taxed like C corporation or pass through entity– Can protect each investor from the liability of the other

members malpractice

Page 23: The “ABC’s” of Accounting

INSURANCE

• In addition to malpractice insurance….– Umbrella Policy– Disability Insurance– Key-man Insurance

• Can fund any buyouts in multi-partner practices• Life insurance is paid out to the practice, which is then

used to purchase the deceased doctor’s interest in the practice from the heirs

Page 24: The “ABC’s” of Accounting

Personal Life Insurance

• Consider establishing an Irrevocable Life Insurance Trust (ILIT)– Usually insurance benefits pass tax-free to beneficiaries, but

proceeds are included in your gross estate, thus subject to income tax

– If policy purchased and owned by ILIT, insurance proceeds should not be included in your estate, thus not taxed

• Also, deducting disability insurance premiums is generally not recommended, despite their short-term tax savings– If they are not deducted, upon payment they will not be taxed

Page 25: The “ABC’s” of Accounting

Additional Resources/Reading

• ACR Residents & Fellow Section on Dollars & Sensehttp://rfs.acr.org/dollars_sense/

• Radiology Business Practice: How to Succeed. Ed. David M. Yousem & Normal Beauchamp, Jr. Saunders/Elsevier 2008.

Page 26: The “ABC’s” of Accounting

Credit and Additional Resource

• All information herein is based on the book, “Radiology Business Practice: How to Succeed” (Ed. David M. Yousem & Norman J. Beauchamp, Jr)