Financial Foundations for Therapists, Part 2: How the Chart of Accounts Shapes Financial Reports in a Therapy Practice
In the previous post in this 3-part series, we introduced the chart of accounts and discussed how it provides the structure that organizes financial activity within a therapy practice.
In this article, we’ll build on that idea by looking at how the structure of the chart of accounts shapes the financial reports practice owners see each month.
To keep things simple, we’ll organize the discussion around three ideas:
The five major sections of a chart of accounts
How revenue categories influence financial reporting
How expense categories influence financial reporting
Understanding these ideas can make financial reports much easier to interpret.
1. The Five Major Sections of a Chart of Accounts
Most charts of accounts are organized into five broad sections.
These sections appear in nearly every accounting system:
Assets
Liabilities
Equity
Income
Expenses
Each section plays a different role in describing the financial activity of the practice.
Assets represent resources that belong to the practice. Examples might include:
Bank accounts
Accounts receivable from insurance reimbursements
Office equipment used in the practice
Liabilities represent obligations that the practice owes to others. Examples may include:
Credit card balances
Payroll-related liabilities
Business loans
Equity represents the owner’s financial interest in the practice. For many solo practices, this reflects the owner’s investment in the business and the accumulated earnings of the practice over time that are re-invested into the practice (instead of being
Income represents the revenue generated by the practice.
Expenses represent the costs required to operate the practice.
This basic framework - assets, liabilities, equity, income, and expenses - is the foundation of an accounting system you see in software like QuickBooks.
Within these five sections, however, the specific categories can vary depending on how the practice organizes its financial activity.
That brings us to the second idea.
2. How Revenue Categories Shape Financial Reporting
Revenue categories determine how income appears on the profit and loss statement. Therapy practices may generate income through a variety of services. For example, a practice might receive revenue from:
Insurance reimbursements
Self-pay therapy sessions
Group therapy programs
Psychological assessments
Workshops or educational programs
Each of these activities contributes to the overall income of the practice.
How those activities are categorized within the chart of accounts determines how they appear in financial reports.
For example, if all revenue is grouped into a single income category, the profit and loss statement will show only total revenue. However, if revenue is organized into categories that reflect the services offered by the practice, those categories will appear separately in the report.
Both approaches may technically work from an accounting perspective. But the way revenue is categorized determines how much detail the financial reports provide. And here’s the key insight: the detail can help practice owners better understand how income flows through the practice.
Now let’s look at the third idea.
3. How Expense Categories Shape Financial Reporting
Expense categories influence how the costs of operating the practice appear in financial reports. Therapy practices typically incur different types of expenses. Some expenses relate directly to delivering clinical services. Other expenses relate to the infrastructure that supports the practice.
Examples of common expenses in therapy practices might include:
Office rent
Electronic health record software
Practice management systems
Professional insurance
Continuing education
Professional memberships
Marketing or advertising
Legal and accounting services
The chart of accounts groups these expenses into categories so they can be summarized clearly in financial reports. As with revenue, the structure of these categories determines how the information appears in the profit and loss statement.
When expense categories reflect the major areas of activity within the practice, financial reports can make it easier to observe patterns in spending over time. This can help you identify why expense is going up, what expense you may want to cut back on, what may be worth investing more in.
Next in This Series
In the final article in this series, we’ll bring these ideas together and walk through a simple way to review the structure of your chart of accounts.
This process can help ensure that the financial structure of your practice remains clear, organized, and useful as your practice grows.
Access a Sample Chart of Accounts for Therapy Practices
If you want to evaluate your current foundation, including your Chart of Accounts and how it can be improved, take the 15-question Financial Health Check designed for solo therapists. Ydou will receive a structured score and a clear indication of which stage of support may be appropriate for your practice.