In this blog post, we’ll walk you through some profit center accounting basics in SAP S/4HANA, such as the concepts, roles, and requirements for profit center accounting in your business.
We’ll discuss methods, such as the cost of sales method and the period accounting method, for calculating profits. Furthermore, you’ll learn about profit center accounting through profitability analysis and the account assignment objects you can use for profit centers.
Concepts, Roles, and Requirements
Classic profit center accounting is account based. As a result, values are updated in a profit center based on the individual general ledger accounts from the operational chart of accounts assigned to the company code. The general ledger account is assigned to an account type, such as a balance sheet account, nonoperating expenses or income account, primary costs or revenue account, or secondary costs account. These account types determine the usage of each general ledger account in financial accounting and controlling. In SAP S/4HANA Finance, profit centers are derived from various account assignment objects.
Splitting an organization into profit centers helps you analyze areas of responsibility and effectively assign these areas of responsibility to profit centers. Profit center accounting helps you analyze the costs, profits, balances, and key financial figures for each profit center and helps you understand internal aspects of profitability. This approach essentially reflects the success of each profit center in achieving its profitability goals. Profit center accounting determines profits and losses by region (e.g., plants, geographical locations, etc.); by function (e.g., manufacturing, sales, retail, etc.); or by product. The document splitting functionality helps generate balance sheet reports at the profit center level.
In SAP S/4HANA, profit center accounting is mapped in the Universal Journal by default. This mapping populates profit centers on line items in the Universal Journal. To make this work, you must activate profit center accounting in the Universal Journal by following the IMG menu path Financial Accounting > General Ledger Accounting > Master Data > Profit Center > Activate Profit Center Accounting in Controlling Area. This step opens the Change View “Activate PrCtr Accounting”: Overview screen, shown in this figure.
On this screen, select the ProfitCtr Acctg (profit center accounting) checkbox (1) for the controlling area given in the CO Area column (2). The year shown in the Fiscal Year column (3) represents the start of validity for the controlling area. Click the Save button (4) to activate profit center accounting. As soon as you activate profit center accounting, the system activates some additional validation areas in the background. For example, the system performs profit center consistency checks when posting line items with account assignment objects, such as a cost center or an internal order. The activation of profit center accounting sets the PCRCH field in table TKA00 (5) to the value 2 (6). After the field is set to 2 (Account Based Profit Center Accounting is active) (7), if a posting is made with the profit center or a partner profit center in the line items, the system checks for this profit center (or partner profit center) and updates both in the Universal Journal. SAP doesn’t support profit center accounting across controlling areas; therefore, profit center accounting works only within one controlling area. To support the transition to SAP S/4HANA (on-premise), you can activate classic profit center accounting in SAP S/4HANA. See SAP Note 702854 for instructions on activating or deactivating classic profit center accounting to use profit center accounting in SAP S/4HANA instead.
Methods of Profit Calculation
In this section, we’ll provide a general overview of the methods used to calculate the profit and loss (P&L) for a profit center in SAP S/4HANA. Profit centers reflect the management-oriented structure of your organization and are used for internal control. The performance of each profit center is measured from the operating results of the profit center. You can calculate operating results (P&L) using either of the following methods. Both methods generate the same results.
Cost of Sales Method
The cost of sales method compares sales revenues to the cost of sales. The cost of sales includes costs or expenses incurred for the generation of sales. The table below shows the income statement you would prepare in the cost of sales method.
Sales for the period are directly linked to the production costs of sales, and you can’t see the change in inventory in the financial statement. These costs and expenses are economic values for the resources used in generating sales and may include costs from the previous period. These resources are determined based on functional areas, such as production, research and development, management, and sales and distribution. In SAP S/4HANA, functional areas are derived from controlling objects, such as cost center, profit center, internal order, work breakdown structure (WBS), and product cost collector. The production cost includes proportional costs and structural costs accrued from production. Variances for the period represent the proportional and structural costs included in the production cost for the period.
Period Accounting Method
The period accounting method compares market-driven sales for the period to the total expenditures—that is, the value of the actual goods and services consumed for the generation of sales—for the same period. Therefore, in this method, differences in cost arise because the quantity sold is not the same as quantity produced. This difference represents a change in inventory for work in process (WIP), semi-finished goods, and finished goods. The following table shows an income statement you would prepare in the period accounting method.
Profit Center Accounting with Profitability Analysis
SAP S/4HANA provides profitability analysis and profit center accounting as key accounting tools to analyze your organization’s profit and progress. Profitability analysis evaluates the performance of your organization and provides market-driven information to managers responsible for decision-making. This information is derived from segments (e.g., products, locations, customers, etc.) and internal organizational units (e.g., company codes, business areas, etc.). Profit center accounting in SAP S/4HANA evaluates the performance of specific internal areas or units of the organization set up as profit centers, which are created based on product, location, or function. Document splitting generates data for balance sheet reporting at the profit center level. The assignment of segment accounting objects to a profit center generates information for segment reporting and fulfills legal requirements codified in International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP) in the US.
Profitability analysis provides results for planning and decision-making at the organization level, which helps in defining profitability segments and analyzing the performance of these segments. Profit centers are management-oriented organizational units used for internal control. Splitting your organization into profit centers helps you analyze areas of responsibilities and assign responsibilities to each profit center.
Profit Center Assignments
Costs and revenues are posted to various account assignment objects such as internal orders, cost centers, fixed assets, and so on. You can assign profit centers to these account assignment objects. These assignments help the system determine profit centers for the line items posted for objects, such as internal orders, cost centers, and so on. The assignment determines the transfer of balance sheet items to the individual profit centers, and you don’t need to post values directly to the profit centers.
Editor’s note: This post has been adapted from a section of the book General Ledger Accounting with SAP S/4HANA by Anand Seetharaju and Mayank Sharma.