What Are the Two Methods of Accounting in Healthcare?
Healthcare practices – whether private clinics, dental offices, or multi-specialty centers – operate in a complex environment where both financial accuracy and compliance are essential. Choosing the right accounting method plays a major role in how a practice manages income, tracks expenses, and reports taxes.
In this blog, we’ll explain the two primary accounting methods used in healthcare, how they differ, and how to determine which one is right for your business.
The Two Main Accounting Methods in Healthcare
- Cash Basis Accounting
- Accrual Basis Accounting
Each method has its own advantages and limitations, especially in the healthcare industry where billing cycles, insurance payments, and reimbursements can stretch across months.
1. Cash Basis Accounting
Cash accounting records income and expenses only when money changes hands. Revenue is recorded when a payment is received, and expenses are recorded when they are actually paid.
Pros:
- Simple to manage
- Easier to understand for smaller practices
- Immediate insight into cash on hand
- No need to track receivables or payables in real-time
Cons:
- Doesn’t show money owed to you or by you
- Can distort financial performance for growing practices
- May not comply with Generally Accepted Accounting Principles (GAAP) for larger healthcare entities
Best for:
- Small solo practices
- Clinics with minimal third-party billing
- Cash-heavy businesses like dental offices or urgent care clinics
2. Accrual Basis Accounting
Accrual accounting records revenue when it is earned (not when it’s received) and expenses when they’re incurred (not when they’re paid). This method matches revenue with the related expenses – providing a more accurate picture of financial health over time.
Pros:
- Tracks receivables and payables accurately
- Aligns income with expenses for better reporting
- Required for GAAP compliance and larger healthcare organizations
- Preferred for multi-provider and insurance-heavy practices
Cons:
- More complex to manage
- Requires professional oversight or accounting software
- May result in taxable income before cash is received
Best for:
- Practices that bill insurance or accept delayed payments
- Larger clinics or multi-specialty medical groups
- Providers seeking external funding, grants, or audits
How to Choose the Right Method
The method you choose impacts not just day-to-day recordkeeping, but also:
- How your income is reported to the IRS
- When expenses are deductible
- How financial reports are generated for decision-making or lending
- Whether you’re GAAP-compliant (which is required for some healthcare organizations)
If you’re a solo practitioner with low overhead and immediate payments, cash basis may be enough. If you’re billing insurance or managing multiple providers, accrual is the more accurate and scalable choice.
Need help deciding? Our team at RemoteBooksOnline can guide you and manage either method through our monthly bookkeeping services, including QuickBooks setup and maintenance.
Test Case: Medical Spa Shifts from Cash to Accrual
Business: A medical spa offering Botox, fillers, and skincare services
Problem: Used cash basis accounting, which hid delayed supplier bills and uncollected receivables. Revenue appeared inflated due to prepayments.
Solution: Shifted to accrual accounting with support from RemoteBooksOnline.
Results:
- Revenue aligned with services actually rendered
- Aged accounts receivable tracked monthly
- Vendor liabilities visible in real-time
- Financial reports became reliable for forecasting and expansion planning
Frequently Asked Questions
Is cash basis accounting allowed in healthcare?
Yes, for small practices. But once you grow or deal with insurance reimbursements, accrual becomes more useful – and may be required for compliance.
Can I switch from cash to accrual?
Yes. You can change methods with IRS approval. RemoteBooksOnline can handle the conversion and set up your books correctly in QuickBooks or Xero.
Do I need different software for each method?
No. Software like QuickBooks supports both cash and accrual – it’s how your transactions are recorded and reports are generated that makes the difference.
Which method is better for tax savings?
That depends on your revenue timing. Accrual gives better visibility, while cash may delay income recognition. A professional bookkeeper or tax advisor can guide you.
Can outsourced bookkeepers handle both methods?
Yes. At RemoteBooksOnline, we support both accounting methods and tailor your service to the method that fits your practice best.
Bookkeeping for Healthcare Practices Made Easy
Whether you’re a solo provider or running a multi-practitioner clinic, your accounting method matters. RemoteBooksOnline offers flat-rate healthcare bookkeeping services, built around the cash or accrual method that fits your needs – with no contracts and expert monthly support.
