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Title: Section 442.12 - Matching of revenue and expenses

442.12 Matching of revenue and expenses. (1320) (a) Determination of the net income of an accounting period requires measurements of revenue, revenue deductions and expenses associated with the period. Hospital revenue must be recorded in the period in which it is earned; that is, in the time period during which the services are rendered to patients and a legal claim arises for the value of the services.

(b) Once the revenue determination is made, a measurement must be made of the amount of expense incurred in rendering the services on which the revenue determination was based. Unless there is such a matching of revenue and expense, the reported net income of a period is meaningless.

(c) The requirement that revenue deductions must also be matched properly against the gross revenues of the reporting period is sometimes overlooked. During the reporting period, patients' accounts receivable will be debited and revenue accounts will be credited, at the hospital's full established rates, for all services rendered to patients. Some of these accounts receivable will remain unpaid at the end of the reporting period. A majority of these accounts will be collected in cash from the patients or from their third-party payors, but the remainder eventually will be written off as deductions from revenue.

(d) It is important that these revenue deductions be given accounting recognition in the same period that the related revenues were recorded, even though certain of these revenue deductions cannot be precisely determined.

(e) Revenue and expenses are to be matched not only for the hospital as a whole, but also for each cost center. The cost center is an accounting device for accumulating items of cost or revenue that have common characteristics. A cost center may or may not be a department within the hospital. A cost center such as depreciation is an example where the cost center would not be a department of the hospital. The costs of the functions and activities included in each cost center description are to be included in the cost center. Revenue relative to such functions and activities must be included in the matching revenue center. For example, expenses related to the clinical laboratory functions (activities) are included in the Laboratory Services-Clinical cost center (account 7210) and related revenue are to be included in Laboratory Services-Clinical revenue center (account 4210).

(f) Some hospitals record revenue on an all-inclusive rate basis (a rate based on type of accommodation regardless of the utilization of ancillary services). Utilization of an inclusive rate system results only in a modification of the patient billing and revenue accounting system. It does not eliminate the need to report expenses in the proper cost center. Those institutions which record charges on an all-inclusive rate basis are not required to report gross patient revenue for each patient care services revenue center. An all-inclusive rate charging system is where the hospital's total charges consist of a rate based on type of accommodation multiplied by length of stay regardless of the utilization of ancillary services.


VOLUME C (Title 10)