Re profit -center accounting

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Re profit -center accounting

Peter Kiessling
Date: Fri, 06 Feb 2015 11:00:07 -0500
From: Mike or Penny Novack <[hidden email] <mailto:[hidden email]>>
To: [hidden email] <mailto:[hidden email]>
Subject: Re: Profit-centre accounting?
Message-ID: <[hidden email] <mailto:[hidden email]>>
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>> 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

Nice Job Mike!  Enjoyed the history lesson. Helps clarify a few slightly cloudy things for me.

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