UNIT 1 ACCOUNTING CONCEPTS AND

APPLICATION
Structure
Objectives
Introduction
What is Accounting
Accounting Process
Objectives of Financial Reporting
Accounting Concepts
1.5.1 Entity Concept
1.5.2 Continuity Concept or the Going Concern Concept
1.5.3 Cost Valuation Concept
1S.4 Double Entry Concept
1S.5 Accrual Concept
1S.6 Matching Concept
Accountancy Conventions
1.6.1 Relevance
1.6.2 Reliability
1.6.3 Materiality
1.6.4 Comparability and Consistency
1.6.5 Conservatism
1.6.6 Periodicity Concept
Critical Appraisal of Concepts and Conventions
Types of Accounts and their Applications
1.8.1 Personal Account
1.8.2 Real or Property Account
1.8.3 Nominal or Fictitious Account
Accounting Books
1.9.1 General Ledger
1.9.2 Cash Book
I .9.3 Petty Cash Book

1.9.4 Subsidiary Book

1.1

Let Us SurnUp

1.11

Self Assessment Questions

1.0 OBJECTIVES
After going through this unit you should be able to:

describe the process of accounting;

explain the objectives of financial reporting;
explain and apply the basic concepts of accounting in your health system; and
distinguish between the types of accounts and their applications.

1.1 INTRODUCTION
It is somewhat unusual to begin a text on Financial Management with a discussion of
Accounting principles q d concepts and one may ask "Why do so here?" The answer quite
simply, is that if hospital managers are to understand the value of financial management for
improved hospltal operations and feel comfortable in its use, they must have a full
understanding of the financial workings of the hebpital. The best way to obtain such an

Financial Management

understanding is to begin with a review of the definition of Accounting, the objectives of

financial reporting and the related Accounting concepts and conventions. An
understanding of these is critical to the knowledgeable use of financial data, for they
determine the nature and character of the financial information that hospital managers
receive. Therefore, if managers are to be able to understand, evaluate property and utilise
financial data. They must first understand the objectives that guide the collection and
presentation of these data.

1.2 WHAT IS ACCOUNTING

Accounting is often called the language of business. The basic function of any language is
to serve as a means of communication. In this context, the purpose of Accounting is to
communicate or report the results of business operations and its various aspects.
Accounting has been variously defined and one commonly accepted definition is
"Accounting is the art of recording, classifying and surnmarising in a significant manner
and in terms of money, transactions and events which are in part at least, of financial
character and interpreting the results thereof."
Another less restrictive definition is "Accounting is the process of identifying, measuring
and communicating economic information to pennit informedjudgements and decisions by
the uses of information."
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1.3 ACCOUNTING PROCESS

The process of Accounting involves the following steps:
a) Data creation and collection which provide the raw material for Accounting. The data
collected is 'historic' is the sense that it refers to events that have already taken place.
b) Recording of data, which is done in accordance with the laid down concepts and
conventions of Accounting as stated later in this unit. A large number of transactions or
events have to be entered in the books of original entry (journals and ledgers.) The
recording and processing of information usually accounts for a substantial part of total
accounting work. The processing methods employed for recording may be manual,
mechanical or electronic computer are generally taking to the primary method of
recording and processing.

c) Data evaluation is regarded as the most important activity in Accounting these days.
Evaluation of data includes controlling the hospital activities with the help of budgets
and standard costs, analysing the flow of funds and analysing the accounting
information for decision making purposes by choosing among alternative courses of
action. The analytical and interpretationwork of Accounting may be for internal or
external use and may range from snap answers to elaborate reports. Data evaluation
has another dimension and can be known as auditor work which focuses on
verification of transactions as entered in the books of Account and authentication of
financial statements. Auditing will be discussed separately as a different unit in this
block.
d) Data reporting consists of two parts-external and internal. External reporting refers to
the communication of financial information viz. earnings financial and funds position
about the hospital to outside parties i.e. trustees, G o v e m ~ nagencies
t
and regulatory
bodies. Internal reporting is concerned with the communica~onof results of financial
analysis and evaluation to hospital management committee f& decision making
purposes.

1.4 OBJECTIVES OF FINANCIAL REPORTING

/

The objectives of financia! reporting are as follows:

a) It should provide information that is useful to present and potential investors, creditors,
and other users in making national investment credit and simi!ar decision.
b) It should provide information about the economic resources of an enterprise, the claimsto those resources and the effects of transactions, events and circumstances that
change resources.
c) It should provide information about an enterprise's financialperformance during a period.

Accounting Concepts
and Application

d) It should provide information about how an enterprise obtains and spends cash, about
its borrowing and repayments, about its capital transactions and about other factors that
.
may affect its liquidity orsolvency.
e) It should provide information that is useful to managers and directors in making decision
in the interest of the enterprise and the owners.
The emphasis of these objectives is on the information needs of external users common to
for profit publicly held enterprise or corporate sectors. However, you may substitute the
terms hospital for enteiprise and community for owners and the objectives are equally
applicable.

1.5 ACCOUNTING CONCEPTS

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Any activity that you perform is facilitated if you have a set of rules to guide your efforts.
When you are driving your vehicle you keep to the left, you are infact following a standard
traffic race. Without the drivers of vehicles following this rule, there would be chaos on the
roads. Similarly without general rule or guides for the recording of business activities and
the preparation of accounts, it would be impossible for the accounting information to be
understandable and useful to various parties. There would be no common basis for
recording transactions. Similar transactions if accounting records are to be understood,
n~
similar results. If this end is to be
must agree at least in terms of ~ c c o u n t i records,
attained certain basic ~ o n c e ~ t s ' , mbe
u ~used
t
in preparing accounting records. Accotmting
practices have be;e,loped over a long period of years. During the time accountants have
accepted $nd ddbptkd several basic concepts as fundamental guides that define the manner
,in wgich accounts should be kept.
Presented below are basic accounting principles or concepts, with .which hospital managers
should be familiar and that they should understand if they are to be able to use accounting
data and reports. It should be pointed out that accounting is not a static art, these principles
are continually being questioned and reviewed and in time will be modified. However, they
are currently the accepted guidelines, and while the reader may question the propriety .of
some, he or she should at this point accept and attempt to understand these principles so as
to be able to utilise accounting data and financial reports knowledgeably.

1.5.1 Entity Concept

In accounting we make a distinction between business and the owner. The hospital or for
that matter any business is named as an entity capable of taking economic actions. The
hospital is an entity separate and distinct from its employee contributors and governing
board. Accounts are kept for this entity and not for the persons associated with the entity.

1.5.2 Continuity Concept or the Going Concern Concept

It's a corollary to the entity concept, accountants have also assumed that the entity will
continue to operate for a long time in the future unless there is good evidence to the contrary.
The hospital or the enterprise is viewed as a going concern to continue in operation at least
in the foreseable future. The persons associated with the entity may come and go but the
entity will remain. Thus in preparing statements and reports the accounting method and
valuations should reflect the continuity assumption instead of the assumption that the entity
will be liquidated and its assets and liabilities should be valued at their liquidation price. ,

1.5.3 Cost Valuation Concept

The resources in terms of land, buildings, machinery etc. that a hospital owns are called
assets.-Themoney value, that are assigned to the assets are derived from the cost concept.
This concept states that,an asset is worth the price paid for or cost incurred to acquire it.
Thus assets are recorded at the original purchase price and this cost is the basis for alq
subsequent accounting for the assets. The assets shown on$e financial statements do not
necessarily @dicate that present market costs (or market valui5s). This is contrary to what is
often believed by an uninformed person reading the statement or report. The term book
value is. used for the amount shown in the accounting records. In case of certain assets the
book and themarket values may be similar, e.g. cash. In general.th&longer an asset has been
owned by the hospital, the lesser are the chances that the accounting or the book value will
correspbnd to the marketvalue.

Financial Management

Admittedly, the use of this cost as thi basis for valuation has some drawback. Overtime,
especially during periods of fluctuating economy, the value of an item can vary
substantially.
In this situation, the accounting value of an item as indicated earlier will accurately referral
only the value of an item as of the time it is acquired and will not show its current months.
Recognising the problem some have argued that a different basis be used-a basis that
should at all time, show the current value of the operation or asset. Cost valuation, has
however the important advantage over all other basis of valuation in that it is determinable,
definite, objective and verifiable. It is not a matter of conjecture or opinion and judgement
and it would be a costly and laborious task for determining the value of each item acquired
at the end of an accounting period. Thus, if accounting records are to provide consistent
and factual figure cost should be used as a basic of valuation.
The cost concept does not mean that all asset remain on the accounting records at their
briginal use for all times to come. The cost of an asset that has a long but linked life in
systematically reduced during its life by depreciation i.e. a process by which the cost of the
asset is gradually reduced or written off by allocating a part of it to expense in cash
accounting period the purpose of depreciation is to allocate the cost if an asset over its
useful life and not to adjust its cost so as to bring it closer to the market value.

1.5.4 Double Entry Concept

The Accounting records should not only reflect on a cost basis of all transactions of the
entity but also be constructed in such a manner as to reflect the two aspects of each
transaction i.e. the change in asset forms or the change in assets and the source of
financing-liabilities for e.g. if a hospital acquires an ambulance for cash not only the cash
account be adjusted but also an entry must be made to show the acquisition of a fixed asset
i.e. the ambulance. This is one concept with which every hospital manager should be
familiar for it is really no more than just requiring that the debit entries balance the credit
entries.

1.5.5 Accrual Concept

Just as the cost valuation concept provides the guide for recording assets and liabilities,
the accrual concept provides the guide for accounting the revenue and expenses. Simply
stated the accrual concept rule says that:

i) revenues and losses should be recorded in the period in which they are realised, and
ii) expense are to be recorded in the period that they contribute to operations.
Realisation of its revenue or loss mean that the gain or loss must be definitely established
and the amount must be determined before an accounting entry is made. Thus,for e.g.
assets must be sold before the gains or loss from holding the assets is entered into the
accounting period.
In allocating expenses, a different guide is used i.e. expenses are recognised in the period
during whch they contribute to operations. This notion can be illustrated by assuming that
employees are paid in January for the work performed in December. The expense should be
allocated to December, the month in which the contribution to op6ations was made, not to
January.
The use of these two rules allowsccountants to allocate revenue and expenses to the
proper accounting period.

1.5.6 Matching Concept

The matching concept build upon the logic underlying the accrual concept. The use of
realisation and contribution rules allows accounting to bring together related income and
expense in an accurate manner in the same accounting period. If the results of a particular
operation are to be described objectively, not only the income and expense of the same
accounting period be brought together but also associated revenue and expense items must
be matched in order to properly determine the income.

If it were not necessary to match related items of revenue and expenditure, then it would be
possible to manipulate income from different types of activities to produce whatever type of
operating picture is desired. Thus, it is only by matchmg expense against related revenue,
the results of a particular operating activity can be accurately and objectively presented.
Activity 1
Study the final accounts of your own hospital or any other hospital that you are familiar
with. Note how the various concepts just studied by you have been applied in preparing
these accounts.

1.6 ACCOUNTING CONVENTIONS

The foregoing concepts should not be regarded as infallible rules to be followed in every
situation. Instances may arise wherein it would be desirable to make certain exceptions in
the application of these concepts. Additionally, in practice, the above concepts are modified
by certain conventions. The most important of which are presented below.

1.6.1 Relevance
Accounting is not intended to capture information from an infinite and unstructured range
of sources. The lnformation must be logically related to management decisions and t o
financial viability to be relevant. Accounting information can be utilised either by improving '
the decision maker's ability to predict a future occurrence or by confining an earlier
judgement. In both situations, the relevance of the information contributes to the ultimate
certainty of the decision and its potential outcomes. Thus, for Accounting lnformation to be
relevant it should be capable of helping users to form a more precise assessment of their
past or future efforts. Timeliness in a necessary aspect of relevance. Untimely data are
irrelevant because they have no capacity to influence decisions. If lnformation is not
available when it is needed or becomes available only after it no longer has any value, it
lacks relevance.

1.6.2 Reliability
In being reliable, Accounting information warrants only what it purports to represent
verifiable information for establishing informed decisions. Reliability does not guarantee
certainty in decision making. Accounting merely functions as a means of representing the
economic decision and financial condition of the enterprise through the selection of
alternatives, yet generally accepted methodologies.

1.6.3 Materiality
There are many activities in the hospital which are of trivial and insignificant nature and the
cost of recording and reporting such events will not be justified by the usefklness of the
information desires. In other words the accounting report should not attempt to reflect a
great number of events that are so insignificant that the cost of recording them are not
justified by the benefits received. For e.g., the matching principle requires that expenses be
matched against relevant revenues. However, in a hospital, an significant amount of revenue
may be obtained from the selling of scrap material, adherence to accounting concepts would
require that the expense involved in collecting and selling such scrap material be offset
against the revenue obtained. (However, unless the revenue from the sale or the expenses
related to those revenues are of real importance it is neither particularly helpful nor
necessary to adherence strictly to theory. The point involved here is of materiality.
Where to draw the line between material and immaterial events is a matter of judgement and
common sense. There are no hard and fast rules in their respect. It is desirable to establish
and follow uniform policies covering such matters.

1.6.4 Comparability and Consistency

In practice there are several ways to record an event or a transaction in the books of
Account, e.g. there are several methods to charge depreciation on an asset or of valuing
inventory. The consistency concept requires that once an organisation has decided one
method and has used it for same time, it should continue to follow the same method or
Grocedure for all subsequent events of the same events character unless it has sound

Accounting Concepts
and Application

Financial Management

reason to do otherwise. If any change is made the departure and its effect must be clearly
indicated in the financial statements Ili the year of the change.
If the full benefiis of Accounting reports are to be obtained, one must be able to compare
reports across similar organisations and between years. To attain such comparability the
reports must be prepared on in consistent basis.

1.6.5 Conservatism
This concept is often stated as "Anticipate no profit, provide for all losses. Only recently
has the accounting profession realised that this introduces a performance has that conflict
with the other accounting conventions. Conservatism is now applied in conjunction with
the measurement of the uncertainty attached to the decision alternatives of a specific
situation. If the value of an asset or an income item is in doubt and any of the possible
estimates is likely to occur, then conservation dictates the selection of the least optimistic
estimate. Jf any estimate is more likely to occur than the others, then conservatism is not
applicable to the situation.

1.6.6 Periodicity Concept

Although the results of operations of a specific enterprise can be known precisely only
after the business has ceased to operate, its assets have been sold off and liabilities paid
off, the knowledge of the results periodically is also necessary. Those who are untested is
the operation of the hospital is business, obviously cannof wait till the end which may not
come at all the requirements of these parties, therefore, force the accountant to report for
the change in the health of a fm or enterprise for short time period. These time periods is
actual practice very, though a year is the must common internal and community adjusted is
the financial year concept.

1.7 CRITICAL APPRAISAL OF THE CONCEPTS AND

CONVENTIONS
While going through all these concepts, probabb you have developed a feeling that they
come in conflict-with each other. You are right.<.'!\ illustrate this by considering some of
these concepts in the content of valuation of hospital properties. Suppose a hospital
acquired a p&ce of land in 1985 for a price of Rs. 6,00,000. Hospital premises were
constructed m 1986 and the hospital operations commences in 1987. The hospital has been
a great success with a profit profile for the past 12 years. The Balance Sheet for the year
1999 is being prepared and 'Lafid' is required to be valued. The estimated current market
price of the land i.e. 60,00,000.
Should you recommend that the land be valued at Rs.60 lakh. The answer is 'No'
obviously. Land would be carried on the Balance sheet at its original costs of Rs. 6 lakh
only. This decision is supported by several of the concepts discusses in this unit. In the,
first place, the stability of purchasing power of money implies in the cost vnluation concept
prevents us from recognising accretion in values as in result of changing price levels. The
accrual concept will not allow umealised profits to be included as long as the land is held
by the hospital and not sold away. You may note that the continuity and the ongoing
concern concept makes any possible market value of land for balance sheet because the
hospital has to continue in business and land will be needed by it for its own use. In this
connection, it could be argued that if land were shown on the balance sheet at its estimated
current market value, the owner might decide to discontinue the hospital sell the land and
retire, the principle of objectivity is now introduced into the argument. It can be easily seen
that in a situation like this the cost of acquisition of land at Rs. 6 lakh in 1985 is the
objective fact because it is based on the transaction that actually took place and this
objective evidence is capable of being verified in contrast the estimate of the current market
value to give may be suspect. It raises many questions. Do you have a market quotatior?fnr
an identical plot of land. Has a similar plot of land been sold recently and can we pick 1 : i ~ p
as a verifiable evidence of the current market price'?Further complications may be noticeci i i
buildings and facilities have been erected on the plot of land. Is it possible to estimate the
value of land without factory building and other facilities constructed on it. The answer is a
flat 'no' and the conservation concept will deter you from accepting an estimate of market
value since it cannot be ascertained with reasonable accuracy.

Activity 2

1) Name the accounting convention isolated if any in each of the following situations:
a) The Rs. 1,00,000 figure for inventory on a balance sheet is the amount for which it
could be sold on the balance sheet date.

Hospital A does not change annual depreciation preferring instead to show the entire
difference between original cost and process of sale as a gain or loss in the period
when the asset is sold. It has followed this practice for many years.

2) Answer whether the following statements are True or False:

a) The Materiality concept I-efersto the state of ignoring small items and values from accounts.

b) Timeliness is not an :mportant aspkct of relevance.

C) Conservation concept forbids the inclusion of cnrealised gains but advocates
provision for possible losses.

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d) Objectivity principle requires that only the information based on definite and

verifiable facts be recorded.

e) Periodicity concept envisages that accounting information should be prepared on a
consistent basis from period to period and in these periods there should be consistent
treatment of similar items.
f ) Reliability concept guarantee certainly in decision making.

1.8 TYPES OF' ACCOUNTS AND THEIR APPLICATIONS

Accounts are divided into the groups:
a) Personal Account

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b) Impersonal Account which is further divided into:

Real or Property Account

ii) Nominal or Fictitious Amount

1.8.1 Personal Account

Relate to persons or organisation which are distinct legal entities. These include patients,
creditors and employee account.
Rule: Debit the receiver and credit the giver. Let us illustrate an example, A sold goods to B
for Rs. 50001Explanation: Here there are two parties affected. Mr. A is selling the goods and Mr. B is at
the receiving end. In the books of A the entry will be as follows.
A Account Rs. 5000/To Goods
Rs. 50001In the books of B the entry will be as follows
Goods Account Rs. 50001TOA
Rs. 50001The point to note is that in the book of A, B is debited and goods account is credited. A
should not credit himself in his own books. Likewise similar treatment is given in B's books.

1.8.2 Real or Property Account

Aspect Accounts are formal Real Account. Here the properties l ~ k cash
e
book, buildings
furniture and other allied assets are included.
Rule: Debit what comes in and credit what goes out.
Example: A hospital purchased furniture for Rs. 2,00,000/Here there are two heads-one is furniture and the other is cash.
The entry will be as follows.
Furniture Account Rs. 2,00,000/To Cash
2,00,000/Explanution: Furniture account is debited because it is coming into the hospital and cash is
credited because it is going out of the hospital.

:ounting Concepts
and Application

Financial Management

1.8.3 Nominal OT fictitious Account

Expenses Income and losses are fonnal nominal account.
Here the items like Rent, Rates, Taxes, Salaries, Discount and Commission are affected.
Income from hospital advances, investment etc. is included.

Example
Paid Rent for building Rs. 50,0001The entry will be
Rent Account Rs. 50,0001To Cash
Rs. 5 0 , W -

Explanation: Rent Account is debited because it is an expense and cash account is

credited because it is a real account where credit should be given for an item that gives out.

1.9 ACCOUNTING BOOKS

The objectives of keeping the Accounting books are to enable the hospital manager to
ascertain easily and conveniently the following at a glance.
a) The financial position of the hospital
b) The assets and liabilities of the hospital
c) Profit earned or loss incurred for a given period
d) The amount owed by others to the hospital and by the hospital to others
e) The financial requirement of the hospital
In a hospital thousands of transaction may take place every day. They are generally of a
repetitive nature llke pools purchase etc. They are reflected on vouchers that could be any
of the following.
a) The document which serves as evidence of the disbursement or receipt of cash e.g., Cash
receipt of the hospital or cash memo for purchase note etc. or an approved invoice from
supplier.
b) The form or a voucher to which bills receipts and other evidence of purchases are

often attached sharing the authority for payment, the terms for settlement etc.
These vouchers are often listed out in various books, a few of items are briefly described in
succeeding paragraphs.

1.9.1 General Ledger

This is the main or basic book of accounting. It contains a record of all transactions for the
accounting period analysed under various accounting heads each referring to a separate
nature of t r a n s a c t i o n ~ e n e r a 1ledger contains all accounts: Personal, Real and Normal.

1.9.2 Cash Book

In any business all the transactions that affect the cash are entered in a book called the
cash book which is kept separate from the other book When cash book is maintained the
cash transactions are not journalised but entered directly in the cash book and then a
corresponding entry is posted in the Ledger Receipts and Payments are generally written on
the opposite side of the cash book. The number of columns provided for amount depend
upon the number of bank accounts being maintained at a regular basis from the receipt
books, the daily collection is analy6ed as under.
a) Cheques and Cash
b) Nature of Receipts such as patient bills, donations, deposits, grants etc.
In the main cash book individual entries are made for each cheque times. Summary totals are
posted in respect of cash receipts.

Accounting Cdncepts
and Application

Let us prepare simple cash book.

Example
01-04-99
02-04-99
03-04-99
10-04-99
12-04-99
14-04-99
20-04-99
24-04-99
29-04-9930-04-99

Cash in hand
Paid rent
Purchased medicine for cash
Car sold scrap for cash
Received cash from patient A
Purchased stationery
Paid to daily wager
Paid maintenance
Paid electricity charges
Paid salaries

Rs. 1,00,000

Rs.
Rs.

Rs.
Rs.

Rs.

1,000
1,000
800
900
750

Rs.

50

Rs.
Rs.

550
1,050
50,000

Rs.

Cash Book
Date

Receipts
Receipt
Folio

I
01-04-99 To Balance B/d
10-04-99 Scrap taken
12-04-99 Patient

Amount
Rs.

Date

1,00,000
800
900

02-04-99
03-04-99
14-04-99
20-04-99
24-04-99
29-04-99
W 9 9

Total
-

01-05-99

Expenditure
Payment Folio Amount
Rs.
ByRent
1,000
By Purchase
1,ooO
By Purchase
750
By Daily wager
50
By Maintenance
550
By Electricity charges 1,050
By Salaries
50,ooO
By Balance Cld
46,300
Total

',00,700

1,00,700

Balance B/d

1.9.3 Petty Cash Book

The popular system of controlling petty cash expenses is through imprest system. Under
this system the petty cash is provided as a round sum in cash, turned as a float sufficient to
cover the estimated petty cash expenditure from a week or a fortnight. Payments made by
the cashier are entered into a petty cash book or register which has several analysis column.
At periodic,intervals written the cash balance with them is near!^ exhausted, he prepares a
petty cash voucher analysing the expenditure incurred under various head and the total
expenditure incurred is down from the new cashier. This voucher is entered in the main cash
book. Petty cash book is in effect a bra h of the main cash book in the sense that the
balance of small surgical entries are sh& by it.
The format generally used for maintenance of petty cash book is as under:
/

Date

Particular

Cash
Book
Folio

Amount
Received

Rate

Particular

Voucher
Total

Petty Cash

1.9.4 SubsidiaryBook
Entries are not made directly l?to the General Ledger. Every entry in the Ledger should be
based on an originating entry, in a subsidiary book. The purpose of subsidiary book is to
record the transactions as they occur and then to make the posting therefrom to the ledger.
They are a number of subsidiary books. These are briefly discussed below:
a) Purchase Book
In the purchase book only credit purchase are recorded and cash purchase are excluded.
The monthly total is posted to the ledger under head purchaser A/c. The invoice number as
given by the supplier is recorded in the purchase book.
Format of Purchase Book
Date

Particular

'Invoice No.

LF

Amount

--

Financial b l a n a g e ~ a e n t

E.xunzple
0 1Apr. 99
10 Apr. 99
15 Apr. 99
30 Apr. 99

Purchased medicines from Chugh Brothers

Purchased Stationery from Murthy Brothers
Purchased Surgical Glasses from Delhi Surgical
Brought Stationery from Sahu by cash

Rs.

Rs.
Rs.

7,000
8,000
10,000

Rs .

600

Purchase Book
Date
April 0 1
April 10
April 15

Particular

Invoice No.

LF

Amount

Rs. 7000.00
Rs. 8000.00
Rs. 10,000.00

Chugh Brothers
Murthy Brothers
DelhiSurgical

Rs. 25,000.00
It is important to note here that the stationery purchased from Sahu by cash is not included
in purchased Book can you tell why?
b) Sale Book (Income System)
Income Register maintained by hospital are more in the nature of statistical record rather
than an Accounting book which demands considerable accuracy. The Income Register
provides for analysis of Income by department without any additional clerical effort. The
patient bills are entered serially. Some of them are paid in cash some after the'bills are raised
(almost simultaneously) and some later. They are posted to the relevant parties' accounts in
the patient ledger once entries are made. Changes, therefore, made through using of credit/
debit note rather than by altering figures in original books. That is so because only credit
sale entries are recorded in the sales book, but in the hospital context there are very few
entries of credit sales.
c) Purchase Return Book
Here the goods returned to the suppliers are entered. A debit note stating the details
prepared are intimated to the suppliers.

d) The other subsidiary books like cash bodk and petty cash books have already been
discussed earlier.
e) General Journal to record transaction not falling in out of the above categories like
depreciation charges entries. After having discussed, the principles of double
entry and after being acquainted with the various Accounting Books, you must
br~eilyacquaint yourselves with journalising the various transactions. Since journal is
the primary step in the Accounting principle.
Exf717zplc.

Let us journalise the following transaction

01.01.99
Commenced a nursing home with cash
15.03.99
Deposits made in State Bank

Rs. 10,00,000/Rs. 5,00,000/-

Journal
Date
01.01.99

15.03.99

Particular
Cash Account
Dr
To Capital
(Being the cash introduced
in hospital)

LF

Credit Account
Dr
To Cash
(Being the amount deposited in Bank)

Debit
10,00,000

Credit
lO,o0,000

5,o0,m
5,o0,000

1) BrieBy discass the various types of Accounts.

2) Ifiuincratr :he varicus Accounting books and briefly discuss how they are maintamed
ill your hsspiial.

Accounting Concepts
and Application

1.1 0 LET US SUM UP

In this unit you have learnt about the concepts of accounting. The foregoing concepts and
conventions have been developed primarily for use by profit making enterprises. These
guidelines, however are equally applicable to hospitals and hospital accounting. Hospitals
though differing in orientation from commercial enterpr' es are still a form of business.
Therefore, the principles of sound business r n a n a g e ~ yas
t mentioned in this unit are just
as applicable to hospitals as to private enterprises. The nonprofit operating philosophy of
most hospital should neither constitute an excuse nor be used as a justification for
irresponsible management or accounting practices. Hospital accounting practices should
thus be based upon the above rules and conventions.

is

Accounting is the language of business and the process of Accounting involves data
creation, collection, evaluation and data reporting. There are several concepts and
conventions of Accounting which hospital management understand as the building of any
hospital Accounting system. The entity concepts makes a distinction between the business
and the owner and the ongoing concern of continuity concepts. You have also learnt about
the cost evaluation concept, and need for recording the costs of assets at the price incurred
to acquire it, and the double entry concept. You have also learnt that on the logic of the
accrual concept the matching concept evolved to match the related items of revenue and
expenditure. Apart from the accounting concepts there are certain accounting conventions
like reliability, materiality, consistency, conservation which a manager should be familiar with
to enable him to understand the basics of accounting practices. There are basically three
types of accounts viz. Personal, Real and Nominal Accounts. The personal accounts relate
to individual or organisational account, real account relates to various aspects of
organisational assets and the nominal account relates to income, expcnses and losses.
Subsequently you learnt that there are a variety of Account~ngbooks which are required to
be maintamed in any organisation ~ncludingthe hospital. The General Ledger is the main or
the basic book of accounting In which a record of all transactions for the accounting are
recorded. The general ledger is supported by various subordinate books like the cash book,
petty cash book, the purchase and sale book, the purchase return book and the general
journal.
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1.1 1 SELF ASSESSMENT

--QUESTIONS
.-

1) ''An understanding of these is critical to the knowledgeable use of financial data". What
does the word 'these' in this statement implies?

2) Define Accounting? Enumerate the steps involved in the process of Accounting.

3) Briefly state the objectives of financial reporting
4) Enumerate the basic Accounting Principles.

5 ) Match the following

Column 'B'

Column 'A'

a) Entity concept

i) Comparing expenses against related revenue

b) Going concern concept

ii) Simultaneous recording of debit and credit

entries

c) Cost valuation

iii) Make clear distinction between the hospital

and owner

d) Dl uble Enhy
e) Accrual

Q Matching
6) Match the Following:

Column A

Column B

a) Personal Account

i] Release to Assets Account

b) Real Account

ii) Release to personal and organisations that are

distinct legal entities

c) Normal Account

iii) Entry of disbursement or rece~ptof cash

d) Voucher

iv) Release to Income and Expenses

State True or False:

a) Cash book is the basic book of Accounting
b) In purchase book only cash purchases are recorded

c) Petty cash book is a subsidiaxy of the main cash book

d) llle Govt. returns to applicants are recorded in the purchase return book
e) Vouchering is not a pre-requisites for any transaction to be recorded in the general
ledger.
f)

All transactions for the accounting period are recorded in the General Ledger.

g) General Journal and General Ledger are the same accounting book.