Every medical practice runs two financial systems that disagree with each other. The practice management system knows what was charged, what was adjusted and what was paid, by patient and by payer. The general ledger knows what hit the bank and what the practice spent. Neither one is wrong. They are counting different things at different moments, and the gap between them is where most practices lose the plot on their own economics.
The instinct is to try to make them agree. That is the wrong goal. What you want is a defined monthly bridge between them that an accountant, a lender and a practice administrator can all read.
What is medical practice accounting?
Medical practice accounting is the discipline of turning a revenue cycle into financial statements, which means recording revenue at what payers will actually allow rather than at what was billed, and reconciling the practice management system to the general ledger every month rather than once a year.
A retail business bills a price and collects it. A medical practice bills a charge nobody pays, has most of it reduced by contract to an allowed amount, collects part of that from the payer and part from the patient, and writes off the rest across several categories that mean very different things. Booking that chain correctly is the entire job. Everything else, payroll, occupancy, supplies, is ordinary small business accounting.
A properly run medical practice close produces:
- Net revenue recorded at expected reimbursement, not gross charges
- Contractual adjustments separated from bad debt and from charity or courtesy write-offs
- Accounts receivable aged by payer class, with patient responsibility tracked separately
- A documented reconciliation from the practice management system to the general ledger
- Provider-level production and cost, in whatever unit the compensation agreements actually use
The three-way reconciliation that should close every month
The control that separates a well-run practice from a busy one is a three-way monthly tie-out. Three sources, two bridging schedules, and a signed-off variance.
- Source one, the practice management system. Charges, contractual adjustments, other adjustments, payments posted, and refunds, for the month. This is the revenue cycle’s own account of itself.
- Source two, the bank. Deposits received, including payer electronic remittances, patient card and cash payments, and any recoupments taken by a payer against current deposits. Recoupments are the item most often missed, because the deposit arrives net and nobody goes looking for the offset.
- Source three, the general ledger. Revenue recognized, cash recorded, and the change in accounts receivable.
The first bridge runs from payments posted in the practice management system to deposits in the bank, and it explains the difference with timing, recoupments, unapplied credits and posting errors. The second bridge runs from net charges in the practice management system to revenue in the general ledger, and it explains the difference with the allowance for contractual adjustments.
Neither bridge should be a mystery, and neither should be rebuilt from scratch each month. Once the two schedules exist, the monthly exercise is filling them in and investigating anything that moves. Practices that run this find posting errors, missed recoupments and unbilled encounters in weeks rather than at year end. Practices that do not run it discover the same items during an audit, a sale, or a bank covenant test. Exact Partners builds this control the same way it builds unit-level and job-level reporting elsewhere, because a reconciliation is only useful if it is a repeatable schedule rather than an annual investigation.
MEDICAL PRACTICE ACCOUNTING
Does your PM system tie to your general ledger?
exact_ builds the bridging schedules, runs the monthly close and reports net revenue, payer AR and provider-level results so the two systems stop telling you different stories. Your billing team keeps doing billing.
Do not book gross charges as revenue
This is the most common structural error in medical practice books, and it survives because it feels conservative.
A practice that records gross charges as revenue and then books contractual adjustments as an expense produces a P&L where revenue is roughly double reality and where a large expense line has nothing to do with any resource the practice consumed. Every ratio computed from that statement is wrong. Supply cost as a percentage of revenue looks half what it is. Payroll looks efficient. A lender reading it will restate it before lending, and a buyer will restate it before buying.
The correct treatment records revenue at the expected allowed amount, with the contractual adjustment as a reduction of revenue rather than a cost. That is also what the revenue recognition standard requires: the transaction price is the consideration the practice expects to be entitled to, not the number on the charge master.
Keep the categories separate underneath. A contractual adjustment is a price the practice agreed to. Bad debt is money the practice expected and did not get. A charity or hardship write-off is a decision the practice made. Collapsing all three into one “adjustments” line destroys the only information that could tell you whether you have a contracting problem, a collections problem, or a policy question.
The 2026 Medicare rates went up, and your revenue might not
Here is a live example of why a practice needs its own numbers rather than headlines.
For calendar year 2026, and for the first time, Medicare has two physician fee schedule conversion factors. Under the CY 2026 Physician Fee Schedule final rule released on 31 October 2025, the conversion factor is $33.57 for qualifying alternative payment model participants and $33.40 for everyone else, against a CY 2025 conversion factor of $32.35. That is an increase of 3.77 percent and 3.26 percent respectively, and it includes a 2.5 percent temporary increase provided under the One Big Beautiful Bill Act plus a 0.49 percent budget neutrality adjustment.
The headline stops there. The rule also finalized a 2.5 percent efficiency adjustment applied to the work relative value units of non-time-based services, and a change reducing the facility practice expense RVUs allocated on work RVUs to half the amount allocated in the non-facility setting. In plain terms, the multiplier went up and the units many practices bill went down, by different amounts depending on specialty, code mix and whether the service is performed in a facility or in the office. Some practices are up more than the headline. Some are down. Details are in the CMS CY 2026 Physician Fee Schedule fact sheet, and the two conversion factors and their year-over-year deltas are set out by the Society of Interventional Radiology.
A practice that can multiply its own top twenty codes by its own volumes knows its answer in an afternoon. A practice that cannot is reading a trade headline and hoping. That calculation is a finance function, not a billing function, and it is the kind of question a fractional CFO answers before the year starts rather than after.
Provider compensation, and why the formula shapes the books
Most multi-provider practices pay physicians on one of three bases, and each one demands something different from the accounting.
| Basis | What it rewards | What the books must produce |
|---|---|---|
| Collections | Cash actually received | Payments posted by rendering provider, net of refunds and recoupments |
| Work RVU | Clinical work performed | wRVUs by provider, reconciled to billed codes |
| Net income share | Practice profitability | Full allocated P&L by provider, with a stated overhead method |
| Salary plus bonus | Retention with upside | Whichever measure the bonus threshold uses, calculated the same way every period |
One caveat, and it causes more partner disputes than anything else on this page: the overhead allocation method in a net income share model is a negotiated choice, not an accounting truth. Equal split, split by production, split by space used and split by patient volume all produce different answers from identical facts. Whatever the agreement says, the calculation has to be reproducible from the general ledger by someone who was not in the room.
The wider point is that a compensation formula tied to collections makes each physician’s pay depend on the billing department’s performance, which they do not control. A formula tied to work RVUs decouples the two and puts the collections risk on the practice. Both are defensible. What is not defensible is a formula the books cannot calculate.
When a practice outgrows its bookkeeper
The signals are consistent. Accounts receivable that nobody can age by payer. A monthly close that arrives after the twentieth. Partner distributions calculated in a spreadsheet the practice administrator maintains alone. A bank asking for something the practice cannot produce. Two providers disagreeing about overhead allocation with no authoritative source to settle it.
Those are not bookkeeping failures. They are a missing layer above bookkeeping, the same layer a growing business fills with an outsourced controller. For practices with more than one site, the consolidation problem is identical to any multi-location business accounting build, and it should be solved with the same structure rather than by adding a second copy of the first practice’s books.
Frequently asked questions
Should a medical practice use cash or accrual accounting?
Cash basis is common and often permitted for tax. For management, a practice needs an accrual view, because on cash basis a month’s reported profit is driven by when payers happened to remit rather than by what the practice did.
How should contractual adjustments be recorded?
As a reduction of revenue, not as an expense. The practice never expected to receive that money, so it was never revenue. Recording it as an expense inflates both revenue and costs and makes every percentage on the income statement meaningless. Keep contractual adjustments, bad debt and charity or courtesy write-offs in three separate accounts, because they answer three different management questions: whether your contracts are priced correctly, whether your collections process works, and whether your write-off policy is being applied consistently. A single blended adjustment line tells you none of the three.
Why will the practice management system never match the general ledger exactly?
Because they measure different events. The practice management system records a charge when a service is coded and a payment when it is posted. The general ledger records cash when it clears and revenue when it is earned. Timing differences, payer recoupments netted against deposits, unapplied credits and refunds all sit between them. The goal is an explained variance, not a zero variance.
What is a realistic monthly close timeline for a practice?
Ten to fifteen business days is normal for a practice running the reconciliations properly. Faster than that usually means something is being skipped.
Do we need a healthcare-specialist accountant?
You need one who will build the two bridging schedules and read the practice management reports, and who understands that revenue is recorded at expected reimbursement. Specialty familiarity shortens the setup. The structure matters more than the label.
Talk to exact_ about your practice close →
About the author. This article was written by Dan Spada, CPA, at Exact Partners, a national outsourced accounting, fractional CFO and business tax firm founded in Buffalo, New York in 2021 and named No. 152 on the 2026 Inc. 5000 list of America’s fastest-growing private companies. Dan and the Exact team build monthly close controls and multi-entity reporting for owner-operated businesses and PE-backed groups. Learn more about Dan Spada and the Exact Partners team.
This article is general information, not accounting, tax, coding or reimbursement advice for your practice. Medicare rates and rules change annually. Confirm your position with a qualified advisor.
