A medical practice bills one number, collects a different number, and often does not know for sixty days which of the two it will end up with. That gap is the central bookkeeping problem for physicians, and it is why the practice management system and the general ledger tell different stories unless someone reconciles them. Add copays collected at the front desk, refunds owed to patients and insurers, provider compensation tied to production, and a building that is often owned by a separate entity, and the books get complicated quickly.
This guide covers the parts that trip up small and mid-sized practices most often: how to record revenue when insurers decide what you actually get paid, how to keep patient money straight, how to handle provider pay and the costs that hide in a practice, and what the monthly close should produce so the owners can run the business rather than only practice in it.
Charges, adjustments, and what counts as revenue
The practice management or billing system records charges at your fee schedule. Insurers then pay according to their contracted rates, and the difference is written off as a contractual adjustment. A $300 charge that an insurer allows at $140 generates $140 of expected payment, a $160 contractual adjustment, and possibly a patient portion for the deductible or coinsurance. None of that $300 is revenue. The revenue is what you are entitled to collect under the contract, and in practice most small practices keep their books on the cash basis and record revenue as the money actually arrives.
Cash basis is permitted for most physician practices for tax purposes and it keeps the general ledger simple: insurance deposits, patient payments, and other receipts are booked when they hit the bank. The detailed accounts receivable lives in the billing system, not in the general ledger. The important discipline is to keep the two in agreement. Every deposit from a clearinghouse or payer should be matched to the electronic remittance advice that explains it, and the billing system's posted payments for the month should tie to the bank deposits for the month. When they do not, a payment was posted to the wrong patient, a deposit was never posted, or a remittance was applied twice, and each of those eventually produces a wrong statement to a patient.
Keep revenue separated by source so the profit and loss statement is useful: insurance collections, patient collections, and other income such as records fees, lab draws, cash-pay services, and any rent received from a sublet. If the practice has more than one location or more than one provider, track revenue by location or provider using classes or departments. The question of how much receivable is really collectible belongs in the billing system's aging report, which the practice should review monthly even when the books are cash basis.
Front-desk payments, credit balances, and refunds
Copays and patient balances collected at the front desk are the most error-prone cash in a practice because they are small, numerous, and handled by several people. Run a daily close: the front desk's batch report of cash, checks, and card payments should match the deposit for that day and the card processor's settlement. Card processors deposit net of fees, so record the gross patient payment, the processing fee as an expense, and the net deposit, rather than letting the net amount stand in as revenue. Reconcile the card processor statement to the bank every month like any other account.
Patient credit balances are a liability, not income. They arise when a patient pays an estimated amount and the insurer later pays more than expected, when both a primary and a secondary insurer pay, or when a copay is collected on a visit the insurer treats as preventive. The money belongs to the patient until it is refunded or applied to a later visit. Review the credit balance report monthly, issue refunds promptly, and know that credits left unclaimed long enough become subject to state unclaimed property rules. Insurer overpayments work the same way. When a payer recoups an overpayment by shorting a later remittance, post the recoupment against the original claim so the later patient's account is not left showing a false balance.
Refunds to patients are reductions of patient collections, not expenses, and refunds to insurers are reductions of insurance collections. Keep both in their own accounts so the owner can see how much money went back out and why. A practice that refunds a large amount every month usually has a front-desk estimating problem or an eligibility verification problem, and the books are where that pattern becomes visible.
Provider compensation, payroll, and the costs that hide
Physician and advanced practice provider compensation is usually some mix of base salary, production bonus, and collections-based or quality-based incentives. The base runs through payroll like any employee. The bonus needs a defined formula and a defined period, and if the formula is based on collections, the bookkeeper needs collections by provider, which is another reason to track revenue by provider from the start. When a bonus has been earned but not yet paid at month end, record it as an accrued liability so the month that generated the revenue also carries the cost of it. Owner-physicians in an S corporation must take a reasonable salary through payroll before distributions; owners of a practice taxed as a partnership take guaranteed payments and draws instead.
Locum tenens providers and other contracted clinicians are independent contractors. Collect a W-9 before the first payment, and anyone unincorporated who is paid $2,000 or more during 2026 needs a 1099-NEC at year end. Malpractice insurance is often paid annually and should be recorded as a prepaid expense and released monthly. Tail coverage purchased when a provider leaves is a real cost that belongs in the month it is incurred. Continuing education, license renewals, board fees, DEA registrations, and hospital privileges are legitimate practice expenses when the practice pays them, and they should be tracked so the owners know the full cost of each provider.
Supplies deserve their own accounts: general medical supplies, drugs and injectables, and vaccines. Vaccines in particular are expensive, are often purchased in bulk, and can represent a significant asset sitting in a refrigerator at month end. A practice that buys a large vaccine order in September and expenses it that month will show a terrible September and a wonderful October. Larger equipment such as exam tables, imaging equipment, and lab analyzers is capitalized and depreciated rather than expensed. If the building is owned by a separate real estate entity controlled by the same physicians, the practice pays rent to that entity under a written lease, and the rent is recorded as rent expense in the practice and rental income in the real estate entity. Keep the two sets of books completely separate.
What the monthly close should produce, and getting help
By the time the previous month is closed, the owners should be able to see a profit and loss statement with revenue by source, collections by provider, staff cost and provider cost as separate lines, and an overhead figure that excludes provider compensation so it can be compared month to month. The balance sheet should show the bank balances, the patient credit balance liability, accrued bonuses, prepaid insurance, equipment net of depreciation, and any practice loans. Alongside those, the billing system should supply the accounts receivable aging and the days-in-AR figure, which are the practice's real early warning system for payer problems.
The books of a medical practice fall behind for the same reason everything else in a practice falls behind: the people who could do it are seeing patients. EVO Bookkeeping reconciles every bank, card, and processor account, categorizes transactions, and delivers your income statement and Balance Sheet by day 2 of the following month, with 1099 prep handled at year end, for $199/month flat. If the books are behind, catch-up is $199 for each month behind, completed within 2 days and guaranteed in writing. There are no contracts and you can cancel anytime. You can get an instant quote on our homepage.