Depreciation in Healthcare Accounting

Depreciation is another important healthcare accounting concept. Like accrual accounting, it provides a better understanding of when expenses happen in relation to income. For example, if a piece of medical equipment is supposed to last five years, it makes more sense to divide the cost of buying it over five years instead of counting all of it in the first year. In year one, writing off the full acquisition cost would artificially lower the net income without recognizing the equipment is an asset with remaining use. In the remaining years, it’s important that the books reflect that there is a cost associated with having that asset, a concept critical in hospital ERP software. Even though it’s already been paid for, once its useful life is used up, the hospital will need to buy a new one and start the cycle again. Depreciation in healthcare is the best way to reduce net income fluctuations and match the cost of assets to when they are used.

Capitalized interest is a subset of depreciation. Capitalized interest is interest on money borrowed to purchase a long-term asset such as a building or piece of medical equipment. The interest is part of the purchase price of the asset. The reason capitalized interest isn’t treated as an expense is the same reason that depreciation in general is used. When a loan is repaid, more money goes toward interest than principal in the early years. However, since the asset is useful over the life of the loan or even longer than the time it takes to repay the loan, the interest expense should be spread over the life of the asset.