A profit center is a division within the entity that is treated separate from the corporation. A profit center is a stand-alone section of the corporation that is required to generate its own profits and perform its own accounting.
Peter Drucker first introduced the concept of profit center in 1945. Later on, he said using the term profit center was one of his biggest mistakes ever and recanted that there are only cost centers in an organization.
Purpose of profit center
The purpose of creating a profit center is to calculate its profit and losses separately. By doing this, the corporation can easily determine the revenue and costs of the specific section of the business and add to management. A profit center is treated exactly like an independent business conducting its business separately and making its own accounts. The upper management of a company segregates the profit center from the main company in order to determine the effectiveness and profitability of each center separately. Usually, the accounts of different profit center within a company are also sent separately to the main company.
Management of profit center
The management of the profit center is hard for the managers of the specific center and requires lots of hard work. Since these managers are responsible for the entire division and are supposed to run the division as a separate business with minimal support from the main company, they are supposed to solve all the internal issues by themselves. The manager of the profit center is held accountable for the activities of that specific division. This means that manager is to account for the revenues, costs and profits as well as losses of the profit center. This is not an easy job, and it is more difficult to run a profit center than a cost center.
If an entity is converting the different divisions of its business into profit centers, it should exercise great care in selecting the management of the profit center. If the top management of the each profit center is eligible, the profits of the each division will skyrocket.
Accounting of a profit center
Although the accounting of different profit centers is separate within the business, the business will publish its joint financial statement for the publication as all the profit centers are in fact, a part of the business.