Key takeaway: Medical-practice accounting should connect billed charges, payer adjustments, patient balances, collections and refunds to the general ledger and bank. That reconciliation supports owner decisions about payroll, equipment, taxes and distributions.
A full appointment schedule does not establish profitable revenue or available cash. Use reports with consistent dates and definitions, document the amounts a practice expects to collect, and trace payments through the billing system and bank.
Separate charges, revenue, receivables and cash
Gross billed charges are the amounts submitted before payer-contract adjustments. Net patient-service revenue reflects the applicable accounting and recognition rules; under accrual accounting it is not simply the gross charge or the cash collected. Receivables represent amounts still expected from payers or patients. Collections settle those balances, often in a later period.
Tax accounting may use a different method from management reporting. Maintain a reconciliation when tax-basis reports differ from accrual financial reports, and label each report’s basis. A bank deposit may also be an owner contribution, loan, refundable advance or overpayment. Its arrival alone does not establish taxable or book revenue.
Read payer remittances before posting adjustments
Reconcile payer payments to the associated claims and remittance advice. Distinguish contractual adjustments, patient responsibility, denials, recoupments and provider-level adjustments. A denial that is being appealed is not automatically the same as a contractual price reduction, and a payer reduction does not automatically become an amount billable to the patient.
CMS explains that electronic remittance advice identifies claim-payment details and adjustments, including claim adjustment reason codes, remark codes and provider-level adjustments such as recoveries of prior overpayments. Use those records to explain payment differences. See CMS payment and remittance guidance.
Example: a $1,000 charge does not create $1,000 of collectible revenue
Assume a completed service has a $1,000 billed charge, a supported $400 contractual adjustment, and an allowed amount of $600. The payer owes $480 and the patient owes $120. Assume the full $600 meets accrual revenue-recognition requirements, with no other adjustments or collection uncertainty in this simplified example.
| Item | Amount | Meaning |
|---|---|---|
| Gross charge | $1,000 | Billing amount before the contractual adjustment |
| Contractual adjustment | ($400) | Supported reduction from the gross charge |
| Net revenue and initial receivable | $600 | $480 payer responsibility plus $120 patient responsibility |
| Payer payment received | $480 | Collection of the payer receivable |
| Patient payment received | $20 | Partial collection of the patient receivable |
| Total collections | $500 | $480 + $20, before any processing fees |
| Remaining patient receivable | $100 | $600 − $500 |
In a ledger recording revenue net, the initial entry is debit receivables $600 and credit patient-service revenue $600. Collection debits cash or the appropriate settlement account $500 and credits receivables $500. A system recording gross charges and contractual adjustments separately must reconcile to the same $600 net revenue and $100 remaining receivable. Do not post revenue again when collecting an already recorded receivable.
Collections are not profit. Staff, supplies, rent and other expenses remain to be recognized, and processing fees or settlement delays can make the bank deposit differ from recorded receipts. Reconcile those differences separately.
Reconcile the revenue cycle each month
- Use a common cutoff. Identify service, posting, payment and deposit dates; different report filters can otherwise create apparent mismatches.
- Reconcile receivables. Start with opening A/R, add net service charges or recognized receivables, subtract applied collections and supported adjustments, and compare with ending A/R. Avoid subtracting contractual adjustments twice if charges are already net.
- Review aging. Separate payer and patient balances, denials awaiting action, missing claims and older amounts. Assign follow-up by payer deadlines and documented collection expectations.
- Tie payments to cash. Match remittances, patient receipts and processor settlements to deposits. Explain fees, timing differences and recoupments.
- Review credits and refunds. Identify duplicate payments, unapplied cash and amounts owed back. Approve refunds and reconcile them to the ledger and bank.
- Tie the billing system to the general ledger. Reconcile net revenue, receivables, cash and refund liabilities. Maintain a documented bridge if the ledger uses a different accounting basis.
Keep the adjustment reason, supporting remittance, approval and date. Separate permission to change charges or write off balances from permission to approve refunds where staffing permits. Review exception reports for unusual adjustments, duplicate refunds and aged unapplied payments.
Keep refund liabilities separate from revenue
For a separate example, assume a patient accidentally makes an additional $40 payment after the bill is fully paid. Record cash and a $40 refund liability or other appropriate patient-credit liability. Refunding that same overpayment reduces the liability and cash. It is not a new operating expense, and the accidental receipt is not additional earned revenue. Determine refund obligations and deadlines from the applicable payer and legal rules.
Connect practice operations to financial decisions
Reconcile payroll registers to wage expense, benefits, withholdings and tax liabilities. Provider compensation based on collections needs a written definition of qualifying collections, adjustments and timing; gross charges should not silently substitute for the agreed measure.
Distinguish supplies consumed from inventory or equipment, and book depreciation from tax deductions. Equipment-loan proceeds increase cash and liabilities; principal repayment reduces both, while interest has separate treatment. Track owner wages, distributions, contributions and loans separately according to the practice’s tax classification.
A short cash forecast should start with available bank cash, add expected collections and subtract payroll, vendor payments, debt service, tax payments, refunds and other commitments. Label collection assumptions and review them against actual results. The IRS recordkeeping guidance explains the role of source records in financial statements, deductions, basis and returns.
Limit patient information to what the work requires
For an initial accounting discussion, begin with aggregate financial statements, payer-level aging totals, collection summaries and a description of the systems. Avoid patient names, dates of birth, account identifiers or clinical details when they are unnecessary.
For a HIPAA-covered practice, an outside accountant whose work involves protected health information may be a business associate. Determine the role and required agreement before providing PHI. HHS includes accounting among services that can create business-associate obligations. See HHS business-associate guidance.
Define the minimum information needed, authorized users, transmission method, access controls and retention responsibilities for the engagement. Apply the HHS minimum-necessary standard where applicable. A local office or a general confidentiality statement does not by itself establish HIPAA compliance.
Define the accounting engagement
Billing and coding, collection follow-up, bookkeeping, payroll, return preparation, planning and clinical or regulatory compliance are distinct functions. Agree on the deliverables, responsible people, report frequency and fees. Management analysis of financial reports also differs from a formal financial-statement review engagement.
CPA Firm South Florida’s tax advisory page describes entity-classification, election and planning services. Its pricing page distinguishes return-related cleanup included in the quoted preparation fee from separate ongoing bookkeeping, payroll, planning and other services. Confirm any medical-billing, software-integration or specialized compliance work in writing.
To discuss the practice’s needs, bring prior returns, current financial statements, bank reconciliations, aggregate billing and collections reports, payroll summaries, entity records and a list of unresolved differences. Use the firm’s contact page to arrange the discussion and confirm how requested records should be provided.
Frequently asked questions
Why do billed charges differ from practice revenue and bank deposits?
Gross charges can be reduced by payer-contract adjustments and other supported price adjustments. Revenue depends on the accounting basis and applicable recognition rules. Collections settle amounts owed and may arrive in another period. Bank deposits can also include loans, owner contributions or patient overpayments, which are not automatically revenue.
What should the monthly revenue-cycle reconciliation include?
Reconcile charges and adjustments, payer and patient balances, collections, refunds and credit balances, processor fees, settlement timing and the general ledger. Tie opening receivables plus net charges, less collections and other supported adjustments, to ending receivables using consistent dates and report definitions.
Should an accountant receive patient charts for an initial consultation?
Start with aggregate financial and operational reports and avoid unnecessary patient identifiers or clinical details. If protected health information is necessary for the agreed work, determine business-associate obligations and the permitted records, access and transmission process before disclosure.
Does tax-return preparation include medical billing and ongoing bookkeeping?
Do not assume it does. Define billing, coding, collections, bookkeeping, payroll, tax preparation, planning and any compliance work separately. CPA Firm South Florida’s published pricing distinguishes return-related cleanup included in the quoted preparation fee from separate ongoing services.