What method of accounting is used in healthcare?
Healthcare organizations—whether hospitals, clinics, private practices, or dental offices—require precise, timely, and compliant financial reporting. But which accounting method is actually used in healthcare?
Download Our Free Brochure →The answer depends on the size and structure of the organization, but most healthcare providers use either the cash basis or accrual basis of accounting.
Understanding the difference is critical for tax reporting, cash flow management, and operational decisions.
1. Cash Basis Accounting in Healthcare
With cash basis accounting, revenue is recorded when it is received, and expenses are recorded when they are paid.
Example:
A dental office bills a patient on May 1 but doesn’t receive payment until June 10. Under cash basis, that income is recorded in June—when the money hits the account.
Advantages:
- Simple to manage
- Easier cash flow tracking
- Often allowed for small practices under IRS rules
Best for:
- Solo practitioners
- Small clinics
- Cash-heavy businesses
2. Accrual Basis Accounting in Healthcare
Accrual basis accounting records income when it is earned and expenses when they are incurred—regardless of when money changes hands.
Example:
A hospital bills an insurance company in January. The revenue is recorded in January—even if the payment arrives in March.
Advantages:
- Matches income and expenses more accurately
- Improves long-term planning
- Required by GAAP for larger healthcare institutions
Best for:
- Multi-location clinics
- Hospitals
- Medical groups using EHR + billing integrations
3. Modified Cash Basis
Some providers use a hybrid model called modified cash basis accounting. It combines elements of both methods:
- Cash basis for income
- Accrual basis for major liabilities like payroll or rent
This is common for practices that want simplicity but need to track larger commitments.
Choosing the Right Method for Your Practice
The IRS generally allows small healthcare providers (with revenue under $27 million/year) to choose cash basis accounting for tax reporting. However, GAAP compliance for funding, audits, or outside investors may require accrual.
Factors to consider:
- Practice size
- Insurance billing volume
- IRS requirements
- Reporting needs for banks or lenders
- EHR/PM system integration capabilities
FAQs
Is accrual accounting required in healthcare?
Only for large providers or those needing GAAP-compliant reports. Smaller practices may use cash basis legally.
Can I switch from cash to accrual later?
Yes, but you may need IRS approval. Work with a tax professional to transition properly.
Which method helps with cash flow visibility?
Cash basis is simpler, but accrual gives a clearer long-term view.
Does QuickBooks support both methods?
Yes. QuickBooks and Xero allow you to toggle between cash and accrual views—though actual tax filings depend on your IRS-approved method.
What about accounts receivable and patient billing?
These are tracked under accrual. If you have large AR balances from insurers or patients, accrual is more accurate.
Conclusion
Healthcare accounting isn’t one-size-fits-all. Smaller practices may benefit from cash basis simplicity, while larger groups rely on accrual to manage complex billing cycles. Choosing the right method affects taxes, compliance, and daily operations.
If you’re unsure which method fits—or just want help getting your books CPA-ready—outsourcing your bookkeeping is a smart move.
Remote Books Online supports healthcare bookkeeping for medical, dental, and wellness practices. Clean books, reconciled accounts, and tax-season-ready records—month after month.
Start your free month: https://www.remotebooksonline.com/
