Accounting Principles for Pharmacy Practice

define accounting

process of analyzing, classifying, recording, summarizing, and interpreting business information into understandable financial terms to facilitate effective business decision making

analyzing

looking at business transactions involving basic ongoing activities (i.e. investing personal cash or equipment into business)

classifying

providing a name for each specific account (i.e. assets, liabilities, and owner’s equity)

recording

writing accounting transactions in journals, financial statements — permanent record

summarizing

totaling of the ledgers and statements for final figures

interpreting

various interested parties looking at final totals to facilitate comprehensive and effective business decisions

internal users

finance, marketing, human resources, management

questions to answer for internal users

• cash sufficient to pay dividends to stakeholders

• what price should we charge for services to maximize net income

• can we afford a 10% raise for employees

• what direct patient care services are most profitable

external users

• labor unions

• creditors

• investors

• customers

• regulatory agencies

• taxing authorities

questions to answer external users

• is company earning satisfactory income

• compare in size and profitability to other companies

• ability to pay debts as they come due

• annual taxes filed

financial accounting

directed toward preparing information for external users to evaluate the organization; refers to the aggregation of accounting information to create financial statements; past transactions

managerial accounting

directed toward preparing information for internal users to use in running the business; refers to internal processes used to account for business transactions; decisions that will impact the future

what is GAAP

recognized set of accounting procedures, standards, and principles

what is the purpose of GAAP

aims to make information relevant (affects decisions of users), reliable (trusted by users), and comparable (helpful in contrasting organizations)

accounting entity

suggests careful attention to separating between economic entity and owner’s personal finances

going concern

plans to remain in existence for the foreseeable future

accounting period

report financial statements appropriate to a specific time period

historical cost

must record and account for assets and liabilities at their historical cost or original cost at the time of purchase or acquisition

objectivity

independent evidence, or reference, is used when accounting transactions are recorded, excluding personal feelings or opinions

conservatism

estimates, evaluations and opinions should neither overstate or understate the business activities of company

consistency

similar concepts and procedures for related items within financial statements are applied for entire accounting period

matching

requires that all expenses directly related to production of revenues be reported within the same period on the income statement

materiality

acknowledges significance of various decisions and ultimate effects on financial statements given the magnitude of a company’s operations

revenue recognition

record their revenues when they are recognized or earned (regardless of when cash is actually received)

what is the accounting equation

assets = liabilities + equity

assets

what you own

liabilities

what you owe

equity

what you get

define revenue

increases owners’ equity; inflows of assets (or reductions in liabilities) in exchange for providing goods and services to customers

define expense

decreases owners’ equity; occurs when resources are consumed in order to generate revenue (costs of doing business, rent, salaries and wages, insurance, etc.)

accrual accounting

records revenue and expenses when transactions occur but before money is received or dispensed

cash accounting

records revenue and expenses when cash related to the transactions actually are received or dispensed

service companies

perform services for a fee

merchandising companies

purchase goods that are ready for sale and sell to customers

manufacturing companies

buy materials, convert to products then sell to other companies or final consumers

activities of businesses

• financing

• investing

• operating

list the 4 basic financial statement

• income statement

• statement of owner’s equity

• balance sheet

• statement of cash flows