Set up bookkeeping and consolidation

Bookkeeping for a dental support organization (DSO) and its professional entities is one general ledger per legal entity, a chart of accounts shared by every PC, production recorded at the amount you expect to collect, intercompany accounts that tie to the cent, and a consolidation that eliminates the management fee. This guide builds each of those from an empty ledger. The monthly routine that runs on top of them is in Your first month-end close.

What you are building

Piece	Rule
Ledgers	One ledger file per legal entity. Never one file with the entities as classes.
Chart of accounts	One PC template, used unmodified by every PC. One DSO chart.
Dimensions	Location and department tags inside each ledger, so office and department reporting do not need extra accounts.
Intercompany accounts	Matched pairs on both sides for the fee, pass-through costs, and loans.
Consolidation	A worksheet that stacks the entity trial balances, posts the elimination entries, and shows the DSO standalone.
Close sequence	A fixed order of entries set by cutoff rules and dependencies, reused for every office.

Production, collections, and the ledger

The ledger maps the PMS vocabulary as follows.

PMS term	What it is	Ledger treatment
Gross production	Services performed, at the office’s full fee schedule	Gross patient service revenue
PPO write-offs and adjustments	The difference between the full fee and each plan’s contracted allowable	Contractual adjustments, contra-revenue, by plan
Adjusted (net) production	Production at contracted rates, which is what the PC is entitled to collect	Net patient service revenue, before expected patient non-payment
Collections	Cash received from payers and patients	Payments against AR

The PMS day sheet and the ledger reconcile through the AR rollforward in step 5 each month.

Steps

Put every entity on the accrual basis

Keep every ledger on the accrual basis from the first entry. Cash-basis books record collections as revenue, which hides receivables, makes the per-PC fee-coverage check meaningless, and cannot be audited or used in a quality-of-earnings review without a full conversion.Under ASC 606, a dental practice recognizes revenue when the dentistry is performed, at the transaction price it expects to be entitled to. PPO write-offs are explicit price concessions. Amounts you do not expect to collect from patients are implicit price concessions. Both reduce revenue, so neither is recorded as bad debt expense unless a patient’s ability to pay deteriorates after the service date. Most practices apply the portfolio practical expedient and estimate concessions by plan and service month rather than claim by claim.¹Tax basis is a separate decision. A PC taxed as an S corporation, or as a C corporation that is a qualified personal service corporation, can generally use the cash method for tax regardless of size. Other C corporations are limited by the gross receipts test in IRC § 448(c), which is indexed each year.² Keep the books on accrual and let the CPA convert at year end. See Prepare for taxes.

Create one ledger per entity

Create a separate company file for each PC and for the DSO. Name them to match the bank accounts, [Brand] [State] PC and [Brand] DSO, so a bank feed and a ledger are never confused. Set the same fiscal year and start date in each. Connect each entity’s bank feeds to that entity’s ledger only.Do not run the group in one ledger with the entities as classes. A class gives you a profit and loss by entity but not a balance sheet, so the PC’s receivables, credit balances, orthodontic contract liabilities, and intercompany payable have nowhere to live. It also makes every bank account visible to every entity.

Build the chart of accounts from one template

Every PC uses the same account numbers with the same meanings. Add an account to the template first, then to every PC, never to one PC alone. Reserve number ranges so additions never collide.

Range	PC	DSO
1000s	Cash by account; patient AR; insurance AR; orthodontic contracts receivable; allowance for contractual adjustments; allowance for implicit price concessions; unsubmitted claims; card settlements in transit; prepaids	Cash by account; management fee receivable by PC; due from PCs; intercompany loan receivable by PC; accrued intercompany interest receivable; dental equipment; leasehold improvements; software and intangibles; accumulated depreciation
2000s	Accounts payable; accrued clinical payroll; payroll taxes payable; patient credit balances; payer overpayments payable; unclaimed property payable; deferred orthodontic revenue; deferred membership plan revenue; due to DSO; management fee payable; intercompany loan payable; accrued intercompany interest payable	Accounts payable; accrued non-clinical payroll; deferred fee revenue; lease liabilities; equipment financing; credit line; term debt
3000s	Common stock held by the dentist-owner; retained earnings; distributions	Members’ capital or stock; additional paid-in capital; retained earnings; distributions
4000s	Gross patient service revenue (production); PPO write-offs and contractual adjustments (contra); implicit price concessions (contra); courtesy and professional discounts (contra); membership plan revenue; other operating revenue	Management fee revenue by PC; pass-through cost reimbursement, if the MSA uses one
5000s	Dentist compensation; hygienist compensation; dental assistant compensation; clinical benefits and payroll taxes; lab fees; dental supplies; malpractice; licensure, credentialing, and continuing education	Not used
6000s	Management fee expense; intercompany interest expense; bank and processor fees; the PC’s own professional fees	Non-clinical compensation and benefits; occupancy; technology and PMS; billing and clearinghouse; marketing; insurance; professional services; equipment leases and maintenance; general and administrative; depreciation and amortization
7000s	Interest income; non-operating items	Intercompany interest income; external interest expense; non-operating items

Sub-accounts carry the plan dimension. Gross production, PPO write-offs, and insurance AR each get sub-accounts by plan (each PPO fee schedule, Medicaid and its dental benefit administrators, and self-pay). The write-off percentage by plan is the number that decides whether to renegotiate or leave a network, audited health care statements customarily disaggregate revenue by payer class.¹ See Underpayments and payer contracts.Lab fees and dental supplies are separate accounts, not a cost of goods line. Lab fees for crowns, dentures, implants, and aligners move with the restorative mix, and acquirers benchmark both lines against production.Credit balances are a liability account, never a negative receivable. A payment that exceeds the balance on an account is credited to patient credit balances or payer overpayments payable at posting. Identified Medicaid overpayments must be reported and returned within 60 days, and unrefunded patient money becomes unclaimed property on the dormancy period of the patient’s state.³ See Report and return overpayments and Escheatment by state.The 5000s hold only costs the PC must bear under the state’s dental practice act: clinical labor, lab fees, dental supplies, and malpractice. Everything else is the DSO’s cost, and it reaches the PC only as management fee expense or as a documented pass-through. A non-clinical cost in a PC 5000 or 6000 account is either allocated to the PC by the MSA or was paid from the wrong account.

Add location and department dimensions

Tag transactions rather than multiplying accounts. In each PC ledger, location is the office and department is the provider type as the PMS defines it: doctor, hygiene, and each specialty department (orthodontics, oral surgery, pediatric dentistry) if the office has one. Every production, write-off, and clinical-cost entry carries both tags. Hygiene can carry 25 to 35 percent of a general practice’s production, and separating it in the ledger is what makes the department reporting in Produce investor-grade reporting possible.⁴In the DSO ledger, department is the function (revenue cycle, IT, HR, marketing, finance, facilities) and location is the PC the cost supports, with a shared-services location for costs that support all of them. A cost-plus or flat fee is computed from exactly this cut, and in states that bar percentage-of-revenue support fees it is the fee’s only basis. See Set the management fee.

Record production net, with a monthly true-up

Post the month’s production from the PMS close reports with one entry per PC, by plan sub-account and department. Gross production goes to AR, and the estimated concessions go to contra-revenue and the allowances in the same month, so net revenue is complete at month end without waiting for remittances.

Entry at month end, from the PMS	Debit	Credit
Insurance AR and patient AR, by plan	$68,400
Gross patient service revenue (production)		$68,400
PPO write-offs (contra-revenue), by plan	$24,600
Allowance for contractual adjustments		$24,600
Implicit price concessions (contra-revenue)	$1,300
Allowance for implicit price concessions		$1,300

When an 835 posts, cash and the actual write-off relieve the receivable and the allowance, not revenue. At the same posting, move the patient responsibility the 835 reports under group code PR (deductible, coinsurance, copay) from insurance AR to patient AR, so the patient balance ages from the remittance date rather than the service date, and record any downgrade difference the plan leaves to the patient the same way.

Entry when the remittance posts	Debit	Credit
Operating account	$520
Allowance for contractual adjustments (actual plan write-off)	$380
Insurance AR		$900

The estimate and the actual will differ, and in dentistry the difference is driven by plan mix and by downgrades, where the plan pays the alternate benefit for a less expensive procedure than the one performed. Run a hindsight analysis each month: for each plan and service month older than the plan’s typical payment lag, compare the net revenue you estimated with the cash plus remaining collectible balance you now see. Post the difference to PPO write-offs or implicit price concessions in the current month and reset the allowance rates by plan. A quality-of-earnings review rebuilds the same cohort table from the 835s. See Understanding 835s.Three month-end accruals belong in the same entry set. Accrue unsubmitted claims (dentistry performed, claim not yet released) at expected net revenue and reverse the accrual next month. Record card settlements gross, with interchange and processor fees as expense, so revenue and fees reconcile separately to the processor statement. Post payer recoupments that arrive as PLB adjustments against the recouped claim’s receivable, not against current revenue.

🦷 Orthodontics. An orthodontic case is a single performance obligation satisfied over the treatment period, so the contract fee is recognized over the expected months of treatment, not when the contract is signed or the down payment is collected. Carry the unbilled contract balance in orthodontic contracts receivable and the collected-but-unearned portion in deferred orthodontic revenue, and release both on the treatment schedule the PMS or ortho module maintains. Transfers in and out, and cases that end early, are contract modifications and need a true-up. Have the CPA set the measure of progress and apply it to every ortho office identically.¹

In-house membership plans work the same way. The annual fee is a contract liability when collected and is recognized over the plan year, and the plan’s included hygiene visits are production at the plan’s rate with no insurance write-off.Tie the ledger to the PMS with an AR rollforward: beginning gross AR, plus gross production, less write-offs and adjustments posted, less bad-debt write-offs, less collections posted, plus refunds issued, equals ending gross AR, which must equal the PMS aging. Net AR is gross AR less the two allowances. Compute days in AR and the collection ratio on net production, not gross.

Set up the intercompany accounts

Create matched pairs, with the PC side and the DSO side named so a reviewer can pair them from the trial balance alone.

PC account	DSO account	Characterization
Management fee expense	Management fee revenue	Fee for services under the MSA
Management fee payable	Management fee receivable	Unpaid invoiced fee
Due to DSO	Due from PC	Costs one entity paid on the other’s behalf
Intercompany loan payable	Intercompany loan receivable	Documented loan under a note
Accrued intercompany interest payable	Accrued intercompany interest receivable	Interest at or above the applicable federal rate
Intercompany interest expense	Intercompany interest income	Same

Book the fee from the DSO’s invoice, in both ledgers, in the period the invoice covers. The PC debits management fee expense and credits management fee payable; the DSO debits the receivable and credits fee revenue. Payment clears the payable and the receivable. Book the fee only from an invoice, and net it against other balances only where the MSA provides for netting. See Move money between PC and DSO.Use the due-to and due-from pair for pass-throughs. When the DSO pays the PC’s malpractice premium or a lab invoice, the DSO debits due from PC and credits cash, and the PC debits the expense and credits due to DSO. Settle the balance in cash each month, or document in the MSA that it is netted against the fee invoice. Which costs pass through and which the fee covers is set by the MSA’s cost schedule, and the ledger follows that schedule.Book loans only against a signed note. Draws credit the loan payable, interest accrues monthly at the note rate, and repayments follow the schedule. A balance in due to DSO that is not settled for several months is an undocumented loan. See Intercompany loan note.Reconcile every pair monthly. The PC’s balance and the DSO’s balance must be equal and opposite before either ledger closes. A difference means one side booked something the other did not.

Map payroll and fixed assets to the owning entity

Clinical payroll runs on the PC’s employer identification number, is paid from the PC’s account, and posts to the PC’s 5000 accounts by department. Non-clinical payroll runs on the DSO’s and posts to the DSO’s 6000 accounts by function and supported PC. Production-based associate pay is computed from the same net production figures the revenue entry uses, with the written definition of gross versus adjusted production and lab-fee treatment from the employment agreement. See Set up payroll.Chairs, handpieces, imaging, and leasehold improvements sit in the ledger of the entity that holds title or signed the lease. Which entity that may be is a matter of state dental law, and several states restrict non-dentist ownership or control of dental equipment or require an equipment lease that leaves the dentist with care, custody, and control. Record the assets where counsel has placed them, depreciate them there, and book any equipment lease between the entities at the stated rent. If you issue GAAP statements, the lessee’s premises and equipment leases go on its balance sheet under ASC 842 as right-of-use assets and lease liabilities.⁵

Build the consolidation worksheet

Consolidation happens outside the ledgers. Export each entity’s trial balance into a worksheet with one column per entity, an eliminations column, and a consolidated total. Post the eliminations on the worksheet, never in an entity ledger.Eliminate each pair from step 6 against its counterpart: fee revenue against fee expense, fee payable against fee receivable, due-to against due-from, loan payable against loan receivable, accrued interest income against accrued interest expense, and, where an intercompany equipment lease exists, its rent income against rent expense.There is no investment account to eliminate against the PC’s equity, because the DSO owns no PC stock. The PC’s paid-in capital and retained earnings carry into the consolidated balance sheet as noncontrolling interest, and the PC’s net income after the fee is attributed to it on the consolidated income statement. Both are usually small, since the fee absorbs most of the PC’s margin.Every elimination nets to zero across the two entities. If one does not, the intercompany pairs did not reconcile in step 6.Produce three views from the same worksheet every month:

View	Shows	Who asks for it
Per entity	Each PC and the DSO standalone	Operators; the fee-coverage check
Consolidated with eliminations	The whole business, intercompany netted, PC equity held by the dentist-owner shown as noncontrolling interest	Auditors, lenders, the board
DSO standalone	The support company alone	Investors, since this is the entity they can own

Under ASC 810 the DSO often consolidates the PCs as variable interest entities, so the consolidated view is what an audit opinion covers and the DSO standalone is a management view. The analysis, and the reasons it can come out differently for a dental group, is in How investors read DSO financials. The ledgers above produce all three views either way.⁶

Set up what the tax return will need

The DSO owns no PC stock, so the group cannot file a consolidated federal return. IRC § 1504 requires 80 percent ownership of vote and value for an affiliated group.⁷ Each entity files its own return, the fee is an ordinary and necessary expense of the PC and income of the DSO, and the books must support that pricing: IRC § 482 lets the IRS reallocate income between organizations controlled by the same interests, so the ledger carries the fee’s FMV support and the AFR interest on loans.⁷Gross-receipts-based state taxes fall on each entity’s receipts separately, so the PC’s patient receipts and the DSO’s fee receipts can both be taxed with no offset for the matching expense. Ohio’s commercial activity tax, Washington’s business and occupation tax, and the Texas franchise tax all work this way, and the group elections that would net intercompany receipts depend on common ownership a DSO-PC structure may not have.⁸ Tag fee revenue by PC state so the CPA can source it. Verify the treatment in each state with counsel.

Order the close by dependency

Four cutoff rules decide which period an item belongs to, and most first-year reconciling differences trace to them.

Item	Period	Consequence
Charges	Date of service	The unbilled accrual covers the lag between service and claim release
Cash	Bank deposit date	A remittance dated the 30th whose EFT settles on the 2nd is next month’s cash and this month’s receivable; match on the TRN trace number, not the remittance date
Adjustments	Posting date of the 835	The allowance absorbs the timing between the estimate and the actual
Management fee	Period the services were rendered	From the invoice, whatever month the PC pays it

The entries then run in an order set by what each one reads:

Post all cash and remittances in the billing system. Every later entry reads its reports, so nothing starts until this is complete.
Post the revenue entry, the unbilled accrual, the credit balance reclass, and the hindsight true-up together. The true-up changes net revenue, so it must land before anything priced from net revenue. Release the orthodontic and membership plan deferrals from the PMS schedules in the same step.
Run the AR rollforward and the three-way reconciliation of billing system, 835s, and bank. Both must pass before the fee is computed.
Post payroll accruals, prepaids, and depreciation in both entities. Production-based associate compensation reads the net production just closed, and non-clinical payroll by cost center is the base of a cost-plus fee, so both close before the fee is computed.
Compute the fee per the MSA, issue the invoice, and book it on both sides.
Settle or document pass-throughs, accrue loan interest, and reconcile every intercompany pair to a zero difference. Neither ledger closes until the pairs tie.
Lock both ledgers, export the trial balances, post the eliminations on the worksheet, and produce the three views.

Set the unbilled and payroll accruals to reverse on the first day of the next period so the actuals post cleanly. Have someone other than the preparer review the reconciliations before the package goes out, even in a two-person finance team.The three-way reconciliation and the close package are walked through in Your first month-end close. The package that grows out of it is in Produce investor-grade reporting.

Concepts the books depend on

The entries above assume fluency in the following. Each is explained on its own page rather than here.

Concept	Where it shows up in these books	Read
Transaction price, explicit and implicit price concessions, portfolio expedient	The revenue entry and the allowances	Source 1 below; Patient responsibility
Production, adjusted production, collections, and downgrades	How the PMS reports map to revenue, contra-revenue, and AR	Underpayments and payer contracts
Claim adjustment group codes (CO, PR, OA) and PLB segments	Which 835 amounts relieve the allowance, which transfer to patient AR, which hit a prior claim	Group codes; Understanding 835s
TRN reassociation	Matching one remittance to one deposit when neither is one-to-one	Understanding 835s
AR rollforward and hindsight analysis	The monthly tie-out and the true-up by plan	Step 5 on this page
Over-time recognition and contract liabilities	Orthodontic contracts and membership plans	Source 1 below
Credit balances, the 60-day rule, unclaimed property	The liability accounts and what drains them	Your first patient refund; Report and return overpayments
Arm’s length, fair market value, and the three characterizations of intercompany money	Why every transfer is a fee, a loan, or a distribution	Intercompany money movement
Applicable federal rate and IRC § 7872	The interest accrual on intercompany loans	Intercompany loan note
Variable interest entity, primary beneficiary, noncontrolling interest	Which view the audit opinion covers and how PC equity presents	How investors read DSO financials
Fee coverage	The per-PC test a reviewer runs on your per-entity view	Where the profit lives
Net AR as collateral	Why a lender’s borrowing base reads your allowances	Working capital and AR lending

Verify it worked

Common failure modes

Failure	Consequence
Entities kept as classes in one ledger	No entity balance sheets; commingling
Divergent charts of accounts across PCs	Manual consolidation every month; no comparable office economics
Gross production booked as revenue	Revenue and every metric built on it overstated by the write-off rate, commonly 30 to 45 percent⁴
Write-offs lumped rather than tracked by plan	Cannot see which contract is reducing margin
Hygiene not tracked as a department	A valuation driver is invisible
Orthodontic fees recognized at signing	Revenue pulled forward; deferred revenue missing from the balance sheet
Concessions booked as bad debt expense	Misstated revenue and margin under ASC 606
No hindsight true-up	Allowance drifts from actual collections; found in quality of earnings
Credit balances left as negative AR	Understated liabilities; unclaimed property and overpayment exposure hidden
Due-to balance that never settles	Recharacterized as an undocumented loan
Intercompany pairs not reconciled monthly	Compounding difference; eliminations fail
Eliminations posted inside an entity ledger	Entity statements corrupted; cannot be unwound
Fee priced without support in the DSO cost centers	§ 482 and FMV exposure, and no defensible basis where percentage fees are banned
Cash-basis books	No AR; unusable for lenders, investors, or audit

Sources

FASB ASC 606, Revenue from Contracts with Customers, as applied to health care entities in the AICPA Audit and Accounting Guide, Revenue Recognition (health care entities chapter): explicit and implicit price concessions, the portfolio practical expedient, over-time recognition for a single performance obligation, and disaggregation of revenue by payer class. Secondary summaries: RevenueHub, Common ASC 606 issues: health care entities; LBMC, How the revenue recognition standard impacts healthcare entities. Confirm the estimation method and the orthodontic measure of progress with your CPA.
26 U.S.C. § 448: § 448(b)(2) exempts qualified personal service corporations from the cash-method limitation; § 448(c) sets the inflation-indexed gross receipts test, with the current-year figure published in the IRS’s annual inflation adjustment revenue procedure. Checked October 2026.
42 U.S.C. § 1320a-7k(d), the 60-day report-and-return rule for identified Medicare and Medicaid overpayments; CMS-4205-F, effective January 1, 2025, aligned the identification standard with the False Claims Act knowledge standard. See Morgan Lewis, CMS overpayment refund final rule. Patient credit balances fall under each state’s unclaimed property statute; see Escheatment by state.
PPO write-off and hygiene benchmarks: Veritas Dental Resources, the true cost of dental insurance participation; Dental Billing Assist, dental billing KPI benchmarks; Dental Economics / Levin Group, research report on hygiene and 2025 annual practice survey. Industry figures, not audited data.
FASB ASC 842, Leases. Private companies may elect the risk-free discount rate practical expedient under ASC 842-20-30-3. State equipment-ownership rules are summarized in MSA clause anatomy and the state pages; confirm placement with counsel and application with your auditors.
FASB ASC 810, Consolidation. See BDO, Control and Consolidation Under ASC 810 (May 2024); KPMG, Navigating consolidation considerations in healthcare acquisitions under CPOM (2025). Confirm application to your facts with your auditors.
26 U.S.C. § 1504(a) (affiliated group requires 80 percent vote and value); 26 U.S.C. § 482 (allocation of income among organizations owned or controlled by the same interests); 26 U.S.C. § 7872 (below-market loans). Whether § 482 reaches a particular DSO-PC pair depends on the facts; verify with your CPA.
Ohio commercial activity tax, Ohio Rev. Code ch. 5751, including the consolidated and combined group rules in §§ 5751.011 and 5751.012; Washington business and occupation tax, RCW ch. 82.04; Texas franchise tax, Tex. Tax Code ch. 171. Treatment of management fee receipts and group elections varies; verify with counsel. Checked October 2026.

Formation & Corporate

Agreements

Credentialing & Payer Enrollment

Billing Operations

Patient Payments & Membership Plans

Acquisitions & Growth

Banking & Finance

Compliance Tasks

Set up bookkeeping and consolidation

What you are building

Production, collections, and the ledger

Steps

Concepts the books depend on

Verify it worked

Common failure modes

Sources

​What you are building

​Production, collections, and the ledger

​Steps

​Concepts the books depend on

​Verify it worked

​Common failure modes

​Sources

What you are building

Production, collections, and the ledger

Steps

Concepts the books depend on

Verify it worked

Common failure modes

Sources