Everything about Profit Center Accounting
This blogpost is a humble attempt to present the scope of Profit Center in SAP Organization Structure. Since it can be used for various purposes and to represent various parts of business, it makes it hard to put a definition around Profit Center. In this blogpost we will try to clear some of the doubts about PCA one might have:
What we will not discuss? – Configuration of PC & PC Group. Creation of PC and PC Hierarchy.
What we will discuss?
- What is the need of PC in a business?
- How can profit center generate complete financial statements?
- What is Segment / Segment Reporting?
- What is difference between PC and Segment?
What is the need of PC in business?
First let’s talk about the concepts of cost center and profit center with an example. Say a company PepsiCo have a line of businesses from where they earn revenue. They operate in Beverages, Fast Food items and Drinking water. So these are the lines of areas which generates revenue and can have their own profitability. But in PepsiCo there are other departments which don’t generate revenue, but it is required to run the business. Departments like Admin, Sales, Production & Finance. So these are considered as Cost centers of a business.
And hence the need of profit center and cost center arises.
Now if we talk specifically about profit centers, then we have heard multiple times that Profit center accounting is used to derive the complete financial statements apart from company code level.
So, we also know that profit center is an independent organization object from a company code. A single profit center can have transactional data from multiple company codes from multiple regions. This ability of PC itself gives an advantage or a scope for fulfilling the limitations of a company code. What cannot be reported on a company code level can be covered by or under profit center accounting.
As mentioned, PC is independent unit from company code so it can be leveraged to do internal reporting for various areas of an organization. It can be associated with specific business units such as product line, division, region etc.
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How can profit center generate complete financial statements?
So, in order to have complete set of financial statements, profit center have to have complete transactional data posted to one or another PC. And each profit center needs to have complete set of accounting entry posted (nothing but equal side of debit and credit for any transaction). And it will made sure by document splitting. Now document splitting is in itself a separate topic to discuss. You can study documents splitting and how it works to understand more about it.
Now the next big question is how the profit center will get all the postings? So profit center will be derived in all accounting documents through various derivation rules. On a broad level we can say PC will get data or get derived by below ways:
Expenses à Cost Center (inside CC a PC will be assigned which will depict all the cost posted on CC)
Revenue à Automatic Account Assignment (Revenue accounts can be directly assigned to PC)
Balance sheet à Business Area (via Business Area)
If you want to go more specifics of PC determination, then you can give a read to blogpost – https://blogs.sap.com/2014/09/08/profit-center-derivation-in-different-scenarios/
After activating document splitting and maintaining derivation of PC you should be able to draw complete financial statements on profit center level
Transaction codes can be used to fetch financial statements – S_PL0_86000028, S_PL0_86000029 and S_PL0_86000030
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What is Segment / Segment Reporting?
The concept of segment is although a very important aspect of business however many businesses do segment reporting due to a legal compliance specially in US region.
Many businesses operates in segments, its nothing but a divisions of business. We can term it as the divisions of business which are contributing to the sales or revenue directly.
To understand it in more better way lets again talk about PepsiCo company, so this company’s revenue comes from Beverages, Fast Food & Snacks. As per US legal compliance the company is liable to do reporting in all segments of business, means the company has to publish their P&L statement in segment wise.
They have to show the breakup of Revenue and profitability by each segment.
Hence the segment in SAP comes into picture. It helps businesses to report the P&L in each segment.
To understand segment reporting concept in more detail, you can watch the below video:
What is the difference between Segment & Profit Center?
So, there is a very thin line between Segment and Profit Center, because both are used for same purpose i.e. to analyze financial data for different aspects of business.
However, the biggest differentiator between segment and Profit center is their purpose of use. PC is used for internal reporting and Segment is purely introduced by the SAP to do external reporting.
Considering it business has to align segments according to the divisions of business which contributes to revenue.
And then Profit center can be used for any of the organizational object to track its profitability.
