Key Principles of Assisted Living Accounting

Assisted living accounting merges principles from hospitality, real estate, and healthcare finance to provide a clear financial picture of a facility’s operations. This financial oversight is necessary for long-term stability and the ability to deliver consistent, high-quality care. Proper financial management ensures resources are available to meet resident needs, from daily assistance to specialized support. Accurate accounting practices allow operators to make informed decisions, manage costs, comply with regulations, and invest in staff and services, ensuring the facility is a safe and supportive home.

Recognizing Diverse Revenue Sources

The primary income source for assisted living facilities is resident fees, recorded monthly as they are earned. This aligns with the accrual basis of accounting, where revenue is recognized when service is provided, not when payment is received. Fees are often tiered based on the level of care, from basic housing and meals to enhanced personal or memory care.

Facilities also generate ancillary revenue from non-core services. These can include on-site beauty shops, specialized therapy sessions, guest meals, and personal laundry. Each revenue stream must be tracked separately to understand its profitability and contribution to the facility’s income, helping management identify popular services and growth opportunities.

Revenue may also come from third-party payers like Medicaid waiver programs. These introduce complexities with billing codes, documentation, and payment delays. Following Generally Accepted Accounting Principles (GAAP), this revenue is recorded when earned, not when cash is received. Managing these receivables is an important part of financial stewardship.

The accounting standard ASC 606 provides a framework for recognizing revenue from resident contracts. This involves identifying the contract and services, determining the transaction price, and allocating it to different services. Revenue is then recognized as each obligation, such as providing housing or care, is fulfilled. This approach ensures revenue is reported accurately over the resident’s stay.

Categorizing Key Operating Expenses

A well-organized Chart of Accounts is used for tracking the costs of running an assisted living facility. This tool classifies every dollar spent, providing clarity on resource allocation. By separating expenses into logical categories, management can analyze spending, create budgets, and identify potential cost savings.

Labor

Labor is the largest operating expense, including salaries, payroll taxes, and employee benefits. Costs are broken down by department for detailed insight into staffing expenditures. Departments include direct care, administration, dietary, and maintenance.

Food and Dietary

The food and dietary category covers all costs for resident meals, including raw food, beverages, and nutritional supplements. It also accounts for supplies needed for food preparation and service. Tracking these expenses helps manage food costs per resident per day, a metric for budgetary control.

Facility and Maintenance

Facility maintenance and repair expenses are required to ensure a safe environment. This category includes routine upkeep like landscaping and janitorial services, plus repairs to building systems like plumbing, electrical, and HVAC. It also covers the necessary supplies and materials for these tasks.

Supplies and Insurance

Medical and resident care supplies are a distinct expense category, covering items from first aid and gloves to specialized medical equipment. Insurance is another operational cost, including general liability, property, and workers’ compensation policies for risk management.

Marketing and Sales

Sales and marketing expenses are incurred to maintain high occupancy. These costs include advertising, promotional events, public relations, and sales staff salaries or commissions. Tracking the return on these investments is important for optimizing marketing strategies.

Essential Financial Reports and Performance Metrics

To assess financial health, operators rely on core financial statements. The Income Statement details revenues and expenses over a period to show profitability. The Balance Sheet provides a snapshot of assets, liabilities, and equity at a point in time. The Statement of Cash Flows tracks cash movement from operating, investing, and financing activities.

From these statements, key performance indicators (KPIs) are derived to measure performance. The Occupancy Rate, the number of occupied units divided by total available units, is a driver of revenue. A higher rate indicates strong demand, with benchmarks often between 85% and 95%.

The Average Daily Rate (ADR) is the total room revenue divided by the number of occupied units. This KPI reflects the average revenue generated per occupied unit per day. Revenue Per Available Unit (RevPAR) is calculated by multiplying the ADR by the occupancy rate, showing how well a facility monetizes its entire unit inventory.

Labor as a Percentage of Revenue is a closely watched metric. This KPI is calculated by dividing total labor costs by total revenue. It helps management gauge the efficiency of staffing levels relative to income, allowing for adjustments to control costs while maintaining care standards.

Managing Capital Assets and Depreciation

A distinction is made between capital expenditures (CapEx) and operating expenses (OpEx). CapEx involves investments in assets providing value for more than one year, like a new vehicle or roof. OpEx are the day-to-day costs of running the facility, such as routine maintenance or utilities. This separation is necessary for accurate financial reporting.

To manage long-term assets, facilities maintain a fixed asset schedule. This list tracks all major physical assets, including the building, furniture, kitchen equipment, and vehicles. The schedule records each asset’s original cost, service date, and estimated useful life. This forms the basis for calculating depreciation.

Depreciation is the process of allocating a tangible asset’s cost over its useful life, spreading the expense over several years. For tax purposes, the depreciation period depends on its classification. An assisted living facility classified as a residential rental property is depreciated over 27.5 years, while a nonresidential commercial building is depreciated over 39 years.

A tax strategy called cost segregation can accelerate depreciation. This process identifies property components like equipment or land improvements that can be depreciated over shorter periods, such as 5, 7, or 15 years. This approach provides tax benefits by front-loading depreciation deductions.

Depreciation impacts both the income statement and the balance sheet. On the income statement, it is a non-cash expense that reduces reported net income and taxable income. On the balance sheet, accumulated depreciation reduces the book value of fixed assets. This provides a more realistic valuation of the company’s assets as they age.

Handling Resident Trust Accounts

Assisted living facilities have a fiduciary duty to manage residents’ personal funds. These funds are not assets of the facility. All resident funds must be held in a dedicated bank account, separate from the facility’s operating accounts, as commingling funds is prohibited.

Accurate record-keeping is a requirement for managing these accounts. The facility must maintain an individual ledger for each resident, tracking every transaction. This includes all deposits and withdrawals for personal expenses. This ensures a clear accounting of each resident’s money.

Residents must receive regular statements of their trust accounts, usually quarterly and always upon request. These statements detail all activity, including balances, deposits, and withdrawals. Upon a resident’s discharge or death, the facility must return any remaining funds to the resident or their estate, often within 30 days.

To protect these funds, facilities are often required to secure a surety bond, which acts as insurance for the residents’ money. If a resident’s account balance exceeds a certain threshold, such as $50, the funds must be deposited into an interest-bearing account. All interest earned is credited to the resident.