Profit-centre accounting?

Mike or Penny Novack stepbystepfarm at mtdata.com
Fri Feb 6 11:00:07 EST 2015


>> I think it might be more symmetric (though more dissonant, to some) to put the profit center's income and expenses under an equity account...
> Exactly! That was the first thing I tried.
>
>> ... but I just tried it and it doesn't work.

I will try this again. Some of you get it, others not. I had the 
advantage (or nuisance) in learning bookkeeping back in the days when 
they made you also learn the history of double entry bookkeeping as well 
the current practice.

ORIGINALLY there were no accounts of type "income" or "expense" (we are 
talking about hundreds of years ago). And there were only "debits" and 
"credits" (no column labels specialized to the type of account). Only 
the account types "asset", "liability", and "equity".

Each transaction was initially entered into a "journal" and then 
"posted" to the "ledger" accounts affected (it was still that way when I 
learned, except for the "cashbook" shortcut). So for transactions we 
would consider "income" or "expenses" were immediately charged to 
equity. It was possible to easily/immediately see what equity was, but 
it wasn't possible to group categories of income and expense.

Then somebody thought of using TEMPORARY accounts so that instead of 
immediately going against equity the transactions were posted to these 
accounts. Which were "income" if their normal balance was credit and 
"expense" if their normal balance was debit. Only at the end of the 
accounting period were these transferred to equity by the "close the 
books" process (first to another temporary account "profit and loss" and 
then that closed by the net gain or loss to equity).

Understand? While we (now) normally group these temporary accounts into 
the categories "income" or "expense" accounts based on their normal 
balances (so we can speak of the total of all accounts of type income 
and the total of all accounts of type expense we CAN group them 
differently if that is better for our purposes. We can choose to 
consider these all as "income" or all as "expense" grouped by job or 
project. We could have normal grouping for the overall entity (its 
general and overhead accounts) and then, assuming we expected jobs or 
projects to be profit making have THOSE accounts as income (but the job 
related expense accounts just have debit balances) and a non-profit 
might have BOTH (for its purpose projects costing money, but its 
fundraising projects making money).

Income and Expense type accounts ARE of fundamental type "equity", but 
don't put them there for now. THAT is what a "close the books" operation 
is about.

Michael D Novack


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