Practice Accounts – What do they mean?
02.04.2020 , BY Nisha Gorasia
02.04.2020 , BY Nisha Gorasia
Any GP aiming to become a partner or any existing partners will need to understand and learn how to read a set of practice accounts. An accountant who specialises in the medical sector is best placed to help you review and understand the accounts.
Let’s start with the basics. Practice accounts will have a partners’ approval page, an accountants’ report, a profit and loss account, a balance sheet, an allocation of profits page, notes to the accounts and performance statistics. Before we review the practice accounts, I think we need to understand the concept of debtors and creditors. In the examples below we will use a financial year end date of 31st March 2020.
Debtors are any income that are owed to the practice but which has been received after 31st March 2020. An example is the QOF achievement income which is normally received in June. All the work to earn this income is carried out during the year to March and therefore any partners working in the practice up to that date should share the total QOF income received. Drugs and enhanced services are other examples of where income is received after the year end date.
Creditors, in contrast, are payments that the practice owes to other entities. An example is the PAYE payment due for the March 2020 staff payroll normally paid to HMRC in April. However, the cost still needs to be reflected in the accounts as the cost related to March payroll costs.
Now we will look at the profit and loss account. This reports a practice’s income and expenditure during a specific period of time, normally a year, which will show the excess of income over expenses. With this information you will be able to make better financial decisions and might be able to focus on trying to make cost savings if expenditure is high in certain areas, such as locums.
The balance sheet shows the practice’s financial health at a single point in time. The balance sheet is often the least understood part of the accounts. Firstly, there are two parts to the balance sheet – the top half which lists all the assets and liabilities and the bottom half which shows each partner’s (or a sole GP’s) share of the ownership of those assets. Both halves will be equal to each other. GP’s should pay attention to their current account balance as this reflects how much money is invested in the business by each partner.
An easy way to understand the current account is to imagine them as the partner’s mini bank accounts within the practice. The balance at the year-end will show money that they could take out. However, you will not be able to take out the full amount as the practice will need working capital. Working capital is the amount partners need to invest in the business in order to keep it running. The amount you might need to hold in your current account would have already been discussed when you became a partner at the practice. This is often called the ‘buying-in’ value or capital.
We will now consider the allocation of profit. Certain income or payments might be attributed to an individual partner. Examples are rent, mortgage Interest, locum costs and seniority. The accounts will show a page which will detail any prior allocated income or expense before the balance is shared out in the partner’s profit-sharing ratio which is usually based on the clinical sessions that they work in the practice. Some practices prefer to calculate percentages to reflect other areas of responsibility within the practice.
Lastly, we will consider the notes to the accounts. This is where a more detail breakdown of income and expenses are provided, together with major items from the balance sheet such as fixed assets, capital accounts (which relate to property ownership) and current accounts. To conclude, performance statistics will be the last page of interest to individual partners. RBP have percentage as a guide to certain costs and income. The practice will be able to see how the practice is performing against other GP Practices. Future articles will explain these areas in more depth.