What Is a Profit Center and Cost Center for Balance Sheet Items?

by Dennis Hartman, Demand Media

Every business must maintain a balance sheet, which is one of the major financial statements that businesses produce and use to track financial performance. A balance sheet lists all assets and liabilities for the business, including those that belong to its profit centers, cost centers and other types of departments or areas of operation.

Profit Center

A profit center is a part of a business that generates revenue while also taking on its own costs, making it possible to calculate the department‘s profit as a self-contained unit. Profit centers may include a general or specific field in which a business operates or a specific market that it operates in, as long as the costs and revenues for that market can be distinguished from those that apply to other markets.

Cost Center Definition

Unlike a profit center, a cost center is not operated with the intention of earning revenue or making a profit directly. Instead, it is a part of a business that generates costs without making money. A cost center only enables profit centers to generate revenue. For example, in a small retail business, each store, or each class of products, may operate as a profit center, while the customer service and human resources divisions operate as cost centers.

Related Reading: How to Make Adjustments to a Balance Sheet for an Inventory Fluctuation

Balance Sheets

Everything that a cost center or profit center owes, owns or expects to pay in the near future is listed on the business‘s balance sheet. For a profit center, balance sheet items may include assets such as product inventory, cash, and buildings or facilities for doing business, while liabilities may include taxes and workers‘ wages. A cost center also contributes both assets and liabilities to a business‘s balance sheet. Assets for a cost center include cash holdings, while liabilities take the form of payroll and corporate bonds. A profit center may maintain its own balance sheet, along with its own income statement, to show its financial position and profitability.

Considerations

Cost center and profit center are just two of the classifications businesses can use to divide their operations. Revenue centers are parts of a business that generate money without taking on the associated costs; they include sales departments. Investment centers deal with outside investments designed to produce income that isn‘t related to operating activities. Not all businesses or managerial accountants use the term "profit center," since every part of a business is dedicated to producing a profit either directly or indirectly.