#1 We know that assets = liabilities plus owners’ equity (the accounting equation). It is foundational this week to know that the accounting equation will always be true. If ever assets do not equal total liabilities plus equity, then we would know there is an error. The accounting equation will never be out of balance.

There are five categories in accounting, three of which make up the balance sheet and two make up the income statement. Assets, liabilities, and equity make up the balance sheet. Revenue and expenses make up the income statement.

We will be learning this week how income statement information affects the balance sheet. On the income statement revenue – expenses = net profit or (net loss). The owners equity section of the balance sheet, more specifically retained earnings, is increased when there is a profit (or equity decreases if there is a net loss). Remember that retained earnings = net profit less any dividends paid.

So the two main statements, balance sheet and income statement are highly related. Each is affected by what happens on the other.

Class: Can you give more examples of income statement data affecting the balance sheet? Please begin a discussion.

#2 We are learning about these statements this week, and I want to make sure everyone begins to understand how the income statement and balance sheet are related. The income statement will always show revenue earned and expenses incurred (resulting in net profit or loss) and the balance sheet indicates a company’s strength. Entries that affect the income statement also affect the balance sheet, and through our reading and class discussion this week the relationships will become more apparent.

Begin thinking about the fact that revenue does not equate to cash, and we’ll be discussing this in greater detail. Revenue represents dollars earned, and is shown on the income statement. Revenue accounts increase on the credit side. The corresponding debit will go to the balance sheet account of Accounts Receivable or Cash. Generally in health care the Accounts Receivable account gets the debit until insurance is collected (cash). We’ll talk more about Accounts Receivable which is an asset account because it is expected to be transferred to cash when the payment comes in.

As you can see, a strong and efficient billing department is required in health care in order that collections are timely and cash flows well so that the business can operate.

Class: Do any of you have experience, either as a worker or a customer, with billing practices of health care agencies? Please begin a discussion.