PURPOSES OF INCOME ACCOUNTING SYSTEMS

Generally, any income accounting system used in the dental office serves five primary purposes.

OFFICE COMMUNICATIONS

It is a method of communication between the front office and the production areas of the office. The receptionist needs to inform the production area assistants who will be coming in and the procedures for which to prepare. After the visit, the doctor, assistants, or hygienist informs the front‐office personnel what procedures they did and the plan for the next anticipated visit (if any). Many practitioners do this in person by walking the patient to the front desk and communicating verbally with the receptionist and patient. Others prefer a more efficient written method. If a practitioner saves 1 minute per patient and sees 20 patients daily, they can either see an additional patient in the time saved (making additional income) or leave the office 20 minutes earlier. Either way, the practitioner wins.

At the beginning of the day, the receptionist posts a copy of the day’s schedule in the operatory area (or each operatory) and the sterilization area. The receptionist then prints a “routing slip” for each patient and places these in the sterilization area. This routing slip specifies the procedure scheduled and often other information such as balance due and medical history alerts. Through this communication, the assistants can prepare appropriate instruments and trays for the given procedure for each patient. Staff generally place routing slips with the tray and take them to the operatory. After the visit, the office staff or doctor notes on the routing slip what procedures they did and variations from the usual fee (if any). (Offices with networked computer systems often provide this information directly in the sterilization area and operatories, saving time, paper, and possible error.)

DOCUMENTATION FOR PATIENTS

An income accounting system provides a receipt to patients, showing the procedures billed that day, evidence of any payment received, and their new balance. When dental practices enter a procedure on a patient’s account, accountants say they have “posted” it to the account. The receptionist completes the receipt after posting the procedures and asking for (and hopefully gaining) payment from the patient for the new current balance (previous balance + charges – adjustments). The receptionist then prints a “walkout statement” for the patient that records this information as they prepare to leave the office.

INSURANCE BILLING

An income accounting system provides information for third‐party carriers (insurance companies) for billing and payment purposes. The more quickly the practice sends accurate information to them, the more quickly the dental practice or the patient will receive reimbursement. The dental office may transmit this information to the insurer either through a mailed paper form or electronically over the internet.

TRANSACTION HISTORY

An accounting information system lists the transaction history (charges, adjustments, and payments) for each patient within the account. The account is the billing unit. The dental office sends one bill to the account guarantor of each account because they are responsible or have guaranteed to pay the account. Each account may contain one or many patients. For example, the father may be the guarantor for an account that contains the spouse and their five children. Or in a divorce situation, the father may be the guarantor for an account in which the child is the only patient. The mother may have custody of the child, but the father is responsible for paying for the child’s healthcare. If the mother is also a patient of the practice, she may be her account guarantor and the only patient on that account. In such a case, the office sends the child’s bill to the father but sends the mother’s bill to her.

The account or account ledger is the history of all the financial transactions for the account. The current balance is the amount the guarantor presently owes the dental practice for all transactions on the account. A positive account balance says that the guarantor owes the practitioner. An account may show a negative account balance if an overpayment exists. Generally, this occurs when a third party overpays or a practitioner changes planned treatment procedures that they have already initiated. (For example, the endodontic procedure that a practitioner initiated changes to a less expensive extraction, although the patient had already paid for the endodontic procedure.) In these cases, the dental practice may write the patient a check for the overpayment, or if the patient desires, the office can retain the patient’s portion of the negative balance to credit it toward future work. Insurance companies will always want the check for a negative balance.

DAILY TRANSACTION JOURNAL

Finally, the accounting information system provides a day sheet or a record of each day’s transactions for the practice (and each practitioner in a multipractitioner office) that summarizes the charges made, payments received, and any adjustments made. The computer program accumulates the day’s transactions to form a monthly ledger. The program then accumulates monthly ledgers into an annual report. Some practice owners rely on their computer back‐up procedure to ensure that their records are complete. Others print a copy of the day sheet and keep it in a binder as an additional data back‐up procedure.

COMPONENTS OF ACCOUNTING SYSTEMS

Computerized accounting systems are composed of a series of related databases. Databases are computer programs that save large amounts of information concerning a specific item, allowing the program to relate that information to other, similar cases. The common databases used by these systems include account information, patient information, third‐party database, procedure database, practice history database, and specific databases.

• Account information defines each account and its guarantor. The account information relates to each patient associated with the account, but the program stores the information about each patient in a different location. Generally, the program stores transaction histories with each account.
• Patient information defines the patient elements (e.g. name, address, age, etc.) and ties them to an account.
• The third‐party database establishes the third‐party carriers, their addresses, and, generally, what each plan pays for each procedure.
• The procedure database defines practitioners’ procedures by specifying ADA code procedure numbers. This file also includes the normal fee for each procedure and the fee allowed by each insurance plan.
• The practice history database holds daily and monthly activity reports (day sheets and monthly summaries).
• Program‐specific databases store information for the individual program. Examples include dunning messages (little notes that appear on patients’ bills), schedule databases, prescription databases, medical history messages, and many other types of information.

These computer programs use each database as needed, pick up the information they require from that database, and then move to the next database, adding the required information. For example, if a practitioner does a two‐surface alloy on a patient with insurance, the program first identifies the patient from the patient database. It then relates that patient to the account, checking to see the account’ balance. It finds the insurance information from the third‐party database, which tells the main program how much the practitioner expects the third‐party carrier to pay for this specific procedure. It checks the procedure code file to decide how much the practitioner typically charges for this procedure. The main program then calculates the amount the patient needs to pay, enters any payments made, and saves that information in the patient’s updated transaction file and on the practice’s day sheet.

ACCOUNTING TERMINOLOGY

A charge is the full fee required by a dental practice to do the service. It is the same as the production figure. Payments may come from the account guarantor or patient as cash, check, or charge card or may come in the mail from third‐party payers, such as insurance companies or employers. Adjustments are the amounts for which a dental practice does not bill. This may result from the patient being a friend or family member or may be required by a managed care insurance plan. A production (or charge) adjustment is a change in the amount of a patient’s account from changes in procedures done. A payment (or collection) adjustment is a change in how much money the dental practice expects to collect from the patient. Either production or collection adjustments can be credited to the account (decreases the balance due) or debited from the account (increases the balance due). In the previous example, the practitioner had initiated and charged an endodontic procedure but then changed this to an extraction. The practitioner has a charge credit (negating part of the endodontic procedure) and a new charge for the extraction. Suppose a practitioner does a procedure on a family member or a managed care patient, “writing off” 50% of the amount due. In that case, the practitioner enters a payment credit because the production remains unchanged. When the computer calculates the new “current balance,” it uses the formula Previous Balance + Charges − Payment − Adjustment = Current Balance (Box 27.3).

A credit is an accounting entry that decreases the account balance. A debit is an entry that increases the account balance. Adjustments may be related either to production (or charge) or to payment (or collection) adjustments (Box 27.4). Either type may be a credit or debit to the account. The practice wants to keep the types separate to keep an accurate tally of office production and collections. The practice also wants a separate payment adjustment for each type (e.g. Delta Dental, Aetna) to track the discounts for each plan. This way, the practice can calculate the overall reimbursement rate for the different plans. The last part of this chapter on dental insurance discusses how to do this.

INCOME ACCOUNTING SYSTEM PROCEDURES

PATIENT WALKOUT PROCEDURES

Once the practitioner does the dental procedure, they need to tell the front office what they did for charge purposes and what they plan for the next appointment for scheduling purposes. If each operatory has a computer station, many offices have the staff directly enter the procedure on the patient’s ledger. When the patient arrives at the front desk to leave, the receptionist has the patient’s bill ready, waiting for payment. If the office uses a routing slip, then staff enter the procedures for the day and plan for the next appointment on the slip. The patient then walks the routing slip to the front desk, where the receptionist enters information on the patient’s ledger, asks for payment, enters any payment into the system, and schedules the next appointment. If a patient pays in cash, the transaction must appear in the payment section of the day sheet. The receptionist then prints a walkout statement detailing the day’s procedures, charges and payments, and an account summary. Even if a patient has a “no charge” visit, the receptionist should give them a walkout statement to verify their previous balance, if any. Finally, if the office uses mailed insurance forms, the receptionist prints out an insurance form of the day’s procedures to put in the mail.

END‐OF‐DAY PROCEDURES

The office needs to close and “proof” day sheets each day. Proofing means that the practice owner verifies or proves the correctness of the entries and the mathematics. The computer program will do the mathematics correctly, but correct results only happen if staff have made the entries correctly. Proofing is important to ensure the accuracy of the accounting and to guard against the possibility of staff embezzlement. Day‐end proofing includes proof of posting, accounts receivable proof and control, cash control, and bank deposit verification. Proof of posting verifies that staff members have correctly entered the day’s transactions, accounted for adjustments, and credited payments correctly. Accounts receivable proofing verifies the accuracy of the total accounts receivable and keeps a running tally of the amount. Cash control checks that staff have accounted for all cash transactions. This cash may be as patient cash payments or in “petty cash.” Bank deposit verification ensures that the staff has included all payments in the bank deposit for the day. End‐of‐day (EOD) checking takes just a couple of minutes each day. It is sound business practice on the part of the practice owner.

The dental office must close the day sheet at the end of the day’s operation and not later. If staff members have made entry errors, they need to address them quickly so that their effect will not multiply through subsequent days. Computer systems will not make mathematical errors, but data entry errors are still a problem. (The receptionist may have entered a collection credit instead of a collection debit, for instance.) The receptionist or office manager will generally make all entries. The practitioner needs to verify the entries and the proofing procedures each day. Again, this is not paranoia, but sound business practice.

By the end of the day, front office staff must have completed several procedures:

• Complete a bank deposit ticket

  Generally, banks prefer their own preprinted deposit tickets rather than those printed by a computer system. The front office stamps all checks as they receive them with the dental practice’s stamp (available from the bank) that states: “For Deposit Only, to the Account of Dr. XXXX, Account # 111‐222‐333‐4.”

• Check that the deposit ticket total matches the day sheet “receipts” total

  This is to verify that the front office has reported all money taken in for the day (cash and check).

• Check the office schedule against the day sheet

  Verify that all patients seen in the office for the day have a corresponding entry on the day sheet. This forces a numbered receipt for each patient visit. The practitioner should check that all procedures the practice did (and charged for) were charged the “usual and customary” amount unless the dentist has specifically authorized an adjustment.

• Verify “proof of posting”

  The practice owner should check that the numbers add up as they should. If the staff know that the practice owner regularly looks at the numbers, they will be much less likely to take liberties with the money.

• Take the day’s deposit to the bank

  The practitioner ought to take the day’s receipts to the bank each day. (This may not be possible if they work late hours.) The practice owner wants the money in their account quickly. The owner also wants all checks, and especially significant cash, out of the office (or in the practice safe) quickly. In that way, if the office is the victim of a break‐in or robbery, they will lose less.

• Occasionally verify the mail

  The practice owner should occasionally (unannounced) open the mail and post checks to patient ledgers themselves. This verifies the accuracy of the postings and decreases the likelihood that a front‐office worker might try to embezzle personal or insurance payment checks from the practice.

• Close the day

  Once the practice owner has verified that all the day’s numbers are correct, they need to close the day in the computer system. The computer system will have routines for doing this. Essentially, closing the day accomplishes the following procedures:

  • Total all numbers that were entered into the system for the day. These include production, collections, adjustments, and other accounting numbers.
  • Reset the accounting numbers to zero for the new, upcoming day.
  • Print out a paper copy of the day sheet for the office’s financial records.
• Back up the computer

  Front‐office employees must back up the computer (data) daily after they have completed all other functions.

END‐OF‐MONTH PROCEDURES

The office needs to do a couple of additional procedures at the end of each month. Again, management computer systems have built‐in procedures that do these functions:

• Close the day

  The business office staff need to be sure they have closed the current day to include any transactions from that day in the monthly totals.

• Calculate monthly totals

  Add up the month’s totals for all running tally numbers (production, collections, etc.) and store a printout of them electronically or in a physical file.

• Reset monthly totals

  Reset those numbers to zero for the upcoming new month.

• Print out monthly reports

  Print a paper copy of monthly totals if the practice owner keeps a paper file.

• Age accounts

  Most offices age their accounts when they run the endof‐month (EOM) procedure.

END‐OF‐YEAR PROCEDURES

End‐of‐year (EOY) procedures are like EOM procedures, except that they account for the entire year. The computer system will guide the user through the procedure:

• Close the month

  Front‐office staff must have closed the current month to include transactions from that month in the yearly totals.

• Calculate yearly totals

  Add up the year’s totals for all running tally numbers (production, collections, etc.) and store a printout of them either electronically or in a physical file.

• Reset yearly numbers

  Reset those numbers to zero for the upcoming new year.

• Print out annual reports

  Print a paper copy of annual totals if the practice owner keeps a paper file.

• Back up the software‘s data

  Many offices run an additional (safety) back‐up for the entire year and store it with the tax records.

TYPES OF PATIENT PAYMENTS

Staff should encourage patients to make payments when a procedure is completed. This may be in the form of cash, check, or credit card. The receptionist informs the patients of the total amount owed. They then receive the payment, enter it into the computer system, and print a walkout statement. After the receptionist gives this to the patient for verification, they stamp the back of the check with a bank deposit stamp and place it and any cash in a secure area of the desk.

CASH

The practice owner must deposit all money taken into the office in the office’s bank account. If they take any cash from patient payments for personal use, they must be sure to use the accounting system totals for income tax determination rather than the checkbook or bank statement. Practice owners may be tempted to pocket cash without entering it into the accounting system. They may know others who do it and get away with it. However, the risks are not worth the little income (income tax savings).

Note that it is not a good idea to take cash for personal use without reporting it to the Internal Revenue Service (IRS) as taxable income. The IRS takes a dim view of people who intentionally do not report income. If a practice owner does this, several negative things may happen:

• If the owner does not include cash payments as income, they will be guilty of income tax evasion or tax fraud, not just a “mistake,” if the IRS catches them. Conviction is a felony and carries a jail term (not just a monetary penalty).
• Employees will see that taking cash (i.e. stealing) is OK. They may be tempted to do similarly. Because the owner may “rake the cash drawer,” they may have no idea how much cash is there or even how much is supposed to be there. Consequently, the owner may have no idea how much cash may be missing.
• A disgruntled or fired employee may want to “get back” at the practice owner. If the former employee reports the owner to the IRS for tax evasion, the former employee gets a “reward” or bounty of 25% of any back taxes and penalties that the owner owes. An employee who knows that a business owner cheats the IRS can be difficult to fire or control in the office.

PATIENT PAYMENT BY PERSONAL CHECK

Many patients pay with personal checks. They should make out the check to the practitioner’s name or the name of the office or practice (if it is different). The front‐office staff stamp each check (on the back in the “endorsements” section) when they receive it. This stamp has “For deposit only” with the bank and account number. (Banks will generally send businesses these stamps, although there may be a small fee.) That way, if someone steals a check, they cannot cash it; they can only deposit it into the practice’s account.

PATIENT PAYMENTS BY CREDIT OR DEBIT CARD

Most offices allow and encourage patients to make payments by credit or debit card. From an accounting perspective, these payments are no different from any other. They are a payment on the day sheet and the patient account.

The practice owner sets up a merchant account with a bank to oversee credit and debit card transactions. (Banks offer different rates, fees, and options, so the practice owner should shop around.) The overseeing bank may hold these payments in a separate account or deposit them directly into the office checking account. When the practice owner transfers this money to the checking account, they do not have to report it. They had already counted it as income when they entered it into the accounting system. Other banks will directly deposit the credit card transaction amount into the checking account the day it occurs. The bank will then summarize the transactions in an EOM statement.

Credit and debit cards charge a fee for each transaction and a monthly service fee. (See Chapter 22 for a detailed discussion.) The banks call this a “holdback” or “discount.” The office staff do not need to enter each transaction fee into the checkbook but rather the entire monthly discount amount. They enter it as a bank expense in the checkbook.

ACCOUNTING FOR TRADITIONAL INSURANCE PAYMENTS

If a patient has dental insurance covering all or part of the fee, then the accounting becomes more complex than for a simple cash transaction. The question is whether the dental office accepts “assignment of benefits.” This means the insurer will send (assign) the benefit (payment) directly to the practice instead of the patient. Chapter 22 discusses this in more detail.

If the practice does not accept the assignment of benefits, accounting is easy. The front‐office staff charges the patient (actually, the account) the full fee and collects it as a fee for service (FFS). They then print a completed insurance form for the patient to submit, and the patient is responsible for getting reimbursement from the insurer.

If the practice does accept the assignment of benefits, staff collect from the patient only the portion that the insurer does not pay. There are two options here. First, the practice can submit the insurance form to the insurer. The insurer sends the reimbursement to the practice. The practice waits until the insurance “clears” and then charges the patient the difference. The second option is to estimate (through the computer system) what the insurer will pay and charge the patient their expected amount immediately (at the time of service). When the insurance company sends payment for its portion, the front‐office staff reconcile their estimate with the actual payment. If there is a difference, the practice either charges or reimburses the difference, depending on whether the total payments are too large or too small. They then close the claim in the computer system so that it will not continue to track it as open (unpaid). The second option speeds cash flow through the practice but may require adjustments after the insurance clears. The practitioner also needs to be sure to keep accurate and up‐to‐date information on the computer system on how much every plan pays for each procedure.

With any of these systems, the practitioner should get a pretreatment estimate of benefits from the insurer, especially for large cases or insurance plans with which the practitioner is unfamiliar. The insurer will send an explanation of benefits (EOB) to the practitioner and the patient. This estimates the patient’s coverage: what the insurer will pay for the procedures that the practitioner has submitted for this patient. It is not a payment or even a contract for payment. It is a good‐faith estimate of what the insurance company will pay. It can (and occasionally does) change from when the practitioner receives the estimate to when they submit the claim for reimbursement. This does not allow or disallow treatment. That is between the practitioner and the patient. The insurer pays (or not) for certain procedures, according to the contract with the patient, practitioner, or employer. The pretreatment estimate defines this payment so that no one is surprised.

Insurers will often send one check to pay for services done for several patients. These “bulk payments” will have a form (explanation of payments) that details the patient payments included, what procedures the payments cover, and the amount of each payment. When the office receives these bulk payments, the front‐office staff allocate them to the proper procedures on the correct patient accounts.

ACCOUNTING FOR MANAGED CARE PAYMENTS

If a dental practice participates in a managed care program, it will have signed a contract agreeing to the terms of the program, one of which is a reduced fee for procedures. Two options exist for these payments, depending on the specific program(s) in which the practice participates. In one, the practice charges and collects from the patient a contractually agreed price for each service. In this case, the front‐office staff enter the full fee value as the charge and then add a collection adjustment of the difference between the full fee value and the contractually agreed fee. This is a “managed care adjustment” or discount. In the second method, the practice submits the full fee value to the managed care insurer like a traditional insurance plan. The managed care insurer then sends payment along with an explanation of the payment that details how much it reimburses and how much (if anything) the practice may charge the patient. The difference between the full fee and the total payments (from the insurer and patient, if any) is the managed care adjustment. Chapter 21 describes the financial impact of managed care participation on the dental practice.

TRACKING WHO OWES MONEY (ACCOUNTS RECEIVABLE)

Immediate payments are easy to account for on the day sheet. A bigger problem comes when patients do not pay immediately, or have a third party that pays all or part of the bill. The practice needs to track the amounts that patients and insurers owe so that the practice can be sure that they pay properly. (See Chapter 22 for a discussion of how to set financial policies for the office.)

All management computer systems have a method for tracking accounts receivable. Most systems call them account aging reports. These reports categorize accounts by the time since the patient made the last payment. The generally accepted categories are 30, 60, 90, and 120 days. An account that falls into the 60‐day category has yet to have a payment made in at least 60 days and possibly as many as 89 days.

Simply printing the report does not solve any problem. The practice owner must use the information on the report. This means calling patients, writing letters, or denying future appointments until the patient brings the balance up to date. The older the account, the more difficult it is to collect. The real value of these reports is to prevent problems by identifying slow payers early so that the office staff can encourage them to pay what they owe.

For patients who have insurance, there are two theories for determining the aging of accounts. (Most dental office software will let a practice choose which method to use.) The practice can “start the clock” for payments when they bill the procedure, or start it when the insurance has cleared and the practice is certain what the patient’s portion of the bill is. If a practice uses the first method, it needs to have good information about the patient’s insurance plan to estimate the patient’s portion accurately. This is less of a problem with common plans in the dental office, but is more of a problem with seldom‐used plans.

The practice also needs to keep track of insurance forms and pretreatment estimates submitted to insurance companies. If the practice does not get a response from the insurance within 30 days (some offices use 14 days), then the practitioner (or staff) will follow up with a telephone call to find out what the problem is. Insurance companies are not usually in a hurry to pay out money, so claims and pretreatment estimates may sit on someone’s desk if they have questions. The practice’s computer program will track “open” (unpaid) claims and pretreatment estimates that insurers have not returned; front‐office staff should use this feature regularly.

MULTIPRACTITIONER OFFICES

Accounting for income becomes more complex in multipractitioner offices. The problem is allocating charges and payments to a particular provider rather than the office as a whole. (If the providers are all on salary or other fixed compensation, then there is no need for allocation; simply tally the office totals no matter who provided the service.) There are two standard methods of allocating payment to providers: first in, first out (FIFO), and specific. FIFO is an accounting term that means the payments go to the first procedure completed on the transaction history. Specific allocation states that the practice will credit the payment to the specific procedure.

For example, Dr. Alpha sees Mrs. Jones and does $300 worth of dental procedures. On the next visit, Dr. Baker does a $400 procedure, which requires a $200 down payment. Mrs. Jones pays $300. Who gets credit for the $300 payment? The FIFO procedure says that Dr. Alpha gets credited. Because those procedures were the “first in” the account, they are the “first out” as well. (This says that the well is filled from the bottom up.) The specific method says to credit Dr. Baker because the requirement for the down payment takes precedence over the age of the receivable. Either way works; the practitioners must be sure to list in advance which method the office will use. (The FIFO method is more common.)

CHECKBOOK SYSTEMS

The office checkbook is the system for managing cash in the practice. A checkbook system can be paper or electronic. It records and categorizes payments made by the business. A practice owner needs to have two checking accounts: one for the office that contains only office expenditures and another personal account that has only personal expenditures. This way, accounting becomes much easier because the practice owner does not need to decide, after the fact, if an item is an office expense or not. All checks written from the office account are business expenses. The categories established for the checkbook register should be the same ones used for tax reports and management information. That way, the owner will not have to recategorize entries when they run reports. (Box 27.5 gives a listing of the categories.)

The front‐office staff deposit all income (cash payments, personal checks received from patients, insurance checks, and credit card payments) into the office checking account. (The total amount of the daily deposit must be the same as the daily receipts on the computer system.) Practice owners then make all office payments from the checkbook and pay the office credit card with a check from the office checking account. If the practice owner borrows money, they add the loan to the checkbook balance, but it is not income for tax purposes.

The check register is the mechanism for recording and allocating office costs. Registers may be paper products (they are available from any office supply house) or they may be part of a computerized check system. Check registers identify checks issued for the month and allow the practice owner to categorize each expenditure for tax reporting and business management purposes. The purpose of the register is not to keep a running tally or balance of the checking account. The practice owner does that in the checkbook and on the check stubs. Instead, the register allocates or categorizes expenses into categories. It then summarizes the categories for the month and “posts” them to an annual report.

The annual report summarizes all office expenses for the year, broken down by category. These categories are the same as on the checkbook register. The annual report is what the practice owner takes to the accountant for tax processing. If a practice owner has done an excellent job in these bookkeeping chores, they will save hundreds or thousands of dollars in tax preparation fees.

TYPES OF CHECKBOOKS