Responsibility accounting is an internal system that holds individual managers accountable for elements of a company’s performance they can control. Departments are classified into cost, revenue, profit, or investment centers, and managers are judged on how well they meet set goals. It is not reflected in a company’s public accounts.
Responsibility accounting is an internal system used to better control costs and performance. Its main focus is to hold individual managers accountable for those elements of a company’s performance that they can control. In most cases, liability accounting does not affect a company’s public accounts.
The idea of accountability accounting is to address the problem that it can be difficult to judge individual company departments simply by their profitability. For example, if a company has a team of traveling sales representatives, it may have a separate travel department that organizes their travel and accommodations. In most cases, such a department will only spend money and not directly generate income. While travel arrangements can be a vital part of the sales process, revenue from sales is likely to be recorded in separate department accounts.
In accountability accounting, each department will have set goals. The relevant manager will be judged on how well he meets these goals. This is similar to most target systems, but will generally work by measuring financially. The important distinction is that this financial evaluation will not necessarily be a pure measure of profitability.
In most accountability accounting systems, each department is classified into one of four categories. A cost center will be judged solely by how low it keeps spending; the travel department in the example above would fall into this category. A revenue department like the sales team will be judged solely on the revenue it generates. A profit center will be judged on a standard profit or loss basis. This could apply to individual stores in a chain.
The final category is an investment center. This can literally involve financial investments, but could also cover departments involved in long-term projects. Departments in that category are generally judged using a longer-term view that takes into account things like capital spending, where the resulting revenue won’t be collected in the first year.
In general, liability accounting is a purely internal measure. Details of your operation and results may be included in a company report, for example, as information to detail changes a company has made. These details would only be used as a way to share information with investors and potential investors. The details are generally not part of the mandatory financial information that a company must include in its public accounts.
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