Departments and Profit Centers Overview

Evaluate the income, cost of sales, and expenses for a segment of your company.

In this article

Getting Started | Examples and Use Cases | Do we need departments and profit centers? | Sample Reports | Related Content

Getting Started

Departments and profit centers are used to help management be able to pull profit reports and other necessary transaction information for divisions within the business. Departments can be a powerful way to analyze the profitability of a specific segment of the company. The system facilitates separate Profit & Loss (P&L) and other financial statements for profit centers. Department ID codes can be used as an extension to the general ledger account numbers to designate account transactions for individual departments.

What is the difference between a department and a profit center?

Although Departments and Profit Centers can be used synonymously, the following distinction will be used throughout the EBMS software:

• A Department is a division within the company. This division may be based on location, function, management, product line, etc. (See examples below.) A department is coded within the Chart of Accounts by a 3-digit extension to the main 5-digit account code.
• A Profit Center consists of one or more departments grouped together for financial summaries such as profit and loss (P&L) and balance statements. A profit center is a unit specifically set up for financial reporting purposes.

General Ledger and Department ID Codes:

Departments are identified within the general ledger Chart of Accounts as a 3-digit extension to the main 5-digit account code.

Example: A company has set up a building maintenance expense account in their Chart of Accounts - the G/L account ID is 73100. The company has two buildings that handle different operations, a store and a warehouse. Because there are clear location and function divisions between the two buildings, they are both considered departments. The store's department code is 100 and the warehouse's code is 200.

If management wanted to combine the financial reporting for both, the two departments could be combined into one profit center, but they decided to track both expense accounts. Since they want separate financial reporting for both locations, they set up the store and warehouse as separate profit centers. In this situation, department equals profit center. It all depends on what financial reports the company wants.

The company combines the G/L account and department codes to create 73100-100 for the store and 73100-200 for the warehouse. These combo codes will keep the building maintenance expense accounts separate, so management can pull reports for both profit centers and compare department performance over time.

Allocating Costs

Overhead costs can be posted to a single general ledger account and then allocated to individual profit centers based on a monthly or annual percentage. The percentage distribution is dynamic and can be entered on a monthly or annual basis. For example, multiple profit centers may share a common building and the building costs such as maintenance, utilities, and insurance. These costs are then distributed to the individual profit centers based on the percent of space used within the building. Review Allocating Indirect Expenses to a Profit Center for more details on this powerful management tool.

It is recommended that you plan your departments and profit centers prior to using EBMS. Creating these groups after transactions have been processed may create some possible complications.

Department and Profit Center Examples

Following are some examples of how Departments and Profit Centers can be set up:

Company departments as divisions:

A hardware store may divide the store into the following departments: tools, lawn & garden, automotive parts, hardware, building supplies, etc. The manager may designate each store department as a separate profit center, or he may choose to combine a few of departments together into a profit center.

A possible advantage of using individual departments as profit centers would be to determine which departments are the most profitable within the store.

Functions and work types as divisions:

A farm equipment dealer may have the following departments: tractor sales, tractor services, lawn and garden equipment sales, and lawn and garden equipment services. The dealership could be divided into the following profit centers, combining departments based on the type of work being done, rather than the product:

• Sales Profit Center which includes all sales departments (tractor sales + lawn and garden equipment sales)
• Service Profit Center which includes all service departments (tractor services + lawn and garden equipment services)

Profit centers can also identify entire divisions within companies, such as manufacturing divisions, service divisions, or sales divisions.

Locations as divisions:

Another possible use for profit centers would be to identify individual locations for companies that have multiple locations. A hardware store owner may own more than one store and wish to separate out locations to track profit & loss for each. Other common location divisions would be between warehouses, parts stores and service centers, or headquarters and satellite offices.

Management as divisions:

If a single manager is in charge of several departments, a profit center can be created based on the manager's area of responsibility. Combine the manager's departments together to create profit centers around management.

Ministry & non-profit fund groups as divisions:

Fund groups within a ministry or non-profit organization can be set up as profit centers. The system allows multiple funds within the capital folder (Fund folder) and a means of separating costs or revenue by funds.

Should our Company Create Departments or Profit Centers?

Here are some guiding questions to help determine whether setting up departments or profit centers would be beneficial to your company. Note that these are general recommendations, and you may wish to consult your accountant or an EBMS consultant.

Questions Section 1:

• Does your company have clear divisions with separate functions or locations?
• Do your different locations or divisions share common assets? (Bank accounts, inventory, buildings, equipment, customers, etc.)
• Can different locations access the same information files?

If yes is the answer to all the questions in section 1, it is recommended to set up a department and profit center for each division.

Question Section 2:

• Can you easily separate most of the revenue and cost of sales expenses for each division?
• Can almost all expenses and sales be separated out between divisions?

If yes is the answer to all the questions in section 2, create departments for each division where it makes sense financially. These divisions could be based on location, management, function, store departments, etc.

Each department can also be a profit center, or departments can be grouped into profit centers, depending on what financial reporting the company needs. If there are fewer than five departments in a company, it is recommended to set each department as a profit center as well.

Note: If a division or location is entirely independent and shares no assets or information with any other division, it is recommended to set it up as a separate company. Review Creating a New Company for more information on how to set up a new company in Server Manager.

If there is confusion about whether a division should be a department, a profit center, or a different company, please contact an EBMS consultant for assistance in planning your department structure.