Your Chart of Accounts Is Hiding Your Practice’s Real Performance
Ask most practice owners how a specific location, service line or provider performed last quarter, and the answer is a shrug or a spreadsheet someone rebuilt by hand. The problem is rarely the accountant or the software. It is the chart of accounts: the list of categories every dollar is recorded in.
Many practices still run on a generic chart. MGMA's Chart of Accounts notes that CPAs often give medical practices the same template they use for retail or service clients. It produces tax returns. It does not produce management information.
What a generic chart hides
A typical small-business chart has a single "wages" line, one "revenue" line and a catch-all for "supplies." Built that way, your P&L cannot answer the questions that drive decisions:
What do support staff cost compared with provider compensation?
How much revenue is lost to contractual adjustments, and how much to preventable write-offs or bad debt?
Is the imaging service, the second location or the new provider actually profitable?
How does your overhead compare with similar practices?
If answering any of these means pulling records and rebuilding numbers by hand, MGMA's guidance is clear: your chart does not have the accounts you need.
How a practice-specific chart is structured
MGMA's chart follows the order of your balance sheet and then your income statement. Sorting your trial balance by account number therefore produces a statement that reads logically. The major blocks are:
1000s, Assets: cash, receivables (with separate allowances for contractual adjustments, bad debt and charity), inventory and equipment.
2000s, Liabilities.
3000s, Equity: including owner and partner draws and distributions.
4000s, Operating revenue: gross charges, adjustments to charges, cash received, refunds, capitation, incentive payments and other medical revenue.
5000s, Support staff: salaries, bonuses, payroll taxes, benefits and temporary staff.
6000s, General and administrative: occupancy, administrative equipment and supplies, purchased services, marketing, insurance, IT and bad debt expense.
7000s, Clinical and ancillary: clinical supplies, imaging, lab, ambulatory surgery and purchased medical services.
8000s, Physician and nonphysician provider costs: owners, employed physicians, locums and advanced practice providers, each tracked separately.
9000s, Nonmedical revenue and expenses: such as interest income and rental income, plus taxes and the accrual-to-cash conversion.
Provider costs sit near the bottom on purpose. In an owner-run practice, owner compensation is what remains after every other expense is paid. Placing it last shows exactly what the practice produced before the owners were paid.
Six changes that make the P&L useful
1. Separate provider costs from support staff costs
This is the single most important change. Support staff belong in the 5000s. All provider compensation and benefits belong in the 8000s.
A common error is recording nurse practitioners and physician assistants as clinical staff. They are providers, and recording them as staff distorts both your staffing ratios and your provider economics.
Within support staff, break salaries out by function, so you can see what each function actually costs:
Administration
Billing and collections
Reception and scheduling
Medical records
Nursing and medical assistants
Ancillary technicians
2. Keep adjustments visible
Accounting rules only require you to report what you are owed. But a practice that books only net revenue cannot see how much it gives away, or why.
Record gross charges, then record adjustments in separate accounts:
Contractual adjustments
Charity care
Professional courtesy
Employee discounts
Keep bad debt apart from all of these. It is an expense for amounts you expected to collect and did not, not a contractual reduction. When the two are mixed together, preventable losses disappear into "normal" adjustments.
3. Use departments for locations and service lines
You do not need a new set of accounts for every location. Use a department or "responsibility center" code alongside the main account, so the same expense account can be reported by site, specialty or service line.
If you own an ambulatory surgery center, an imaging center or real estate as separate legal entities, give each its own entity code. Each one can then be reported on its own and rolled up into a consolidated view.
4. Track costs by provider
A provider code lets you assign direct costs to each physician or advanced practice provider, such as dedicated staff, supplies and equipment, and match them to that provider's revenue. That is the foundation of a credible compensation model and a fair conversation about productivity.
5. Record ancillary and retail economics properly
If you sell durable medical equipment, optical goods, hearing aids or drugs, record the sales and the cost of those goods in matching accounts tied to inventory. Otherwise you cannot tell whether a retail line makes money or just moves it around.
6. Classify the tricky items correctly
Payments to independent contractors belong in purchased services, not in salaries.
Outsourced billing, payroll, card processing and answering services belong in purchased administrative services.
Collection agency fees are their own line.
Retirement plan contributions should record only the employer's share.
Interest income and rental income from subleasing space are nonmedical revenue. They should not inflate your medical revenue.
Cash or accrual? You can have both
Many practices file taxes on a cash basis but need accrual information to manage the business. A well-designed chart supports both:
Record gross charges and adjustments to manage on an accrual basis.
Use a conversion account to produce cash-basis statements for tax purposes.
Your CPA should confirm the right approach for your entity.
Don't overbuild it
More accounts are not better. MGMA publishes two versions of its chart: a detailed one for complex organizations, and a much shorter one for practices with fewer providers and fee-for-service revenue. Accounts nobody needs get used inconsistently, and inconsistent data is worse than no data.
Start with the simpler structure and add detail only where it answers a real management question.
How to switch without losing your history
Time it for the start of a new fiscal or tax year.
List the questions you need the financials to answer, by location, provider and service line.
Decide whether you will use department and provider codes.
Build a crosswalk that maps every old account to its new account, and mark any account with no old equivalent as new.
Draft the reports first. Before you go live, confirm that the new chart can produce each report you need.
Keep the crosswalk so you can compare years before and after the change.
Why it is worth the effort
MGMA's chart numbering lines up with its cost survey, which makes benchmarking against peer practices far more reliable. More importantly, it turns your monthly financials from a tax document into a management tool, one that shows which locations, providers and services create value and which ones quietly consume it.
Ark Advisory Group helps practices restructure their financial reporting and build the monthly dashboards that leaders actually use. Learn more about our healthcare practice consulting, or book a discovery call at (908) 900-4607.
Sources: David N. Gans, Steven Andes and Robert J. Gold, Chart of Accounts, 6th ed. (MGMA, 2014); Taya Gordon and Kem Tolliver, Advanced Strategy for Medical Practice Leaders: Financial Management Edition (MGMA, 2023). Accounting and tax treatment should be confirmed with your CPA. Some classifications in the 2014 edition, such as extraordinary items, have since changed under current accounting standards.
