Responsibility accounting is a method of accounting in which diverse sections, divisions and departments of an organization are set up as ‘Responsibility Centres’. Responsibility accounting is a reporting system that compiles revenue, cost, and profit information at the level of those entity managers most directly responsible for them. The head of the centre is responsible for achieving the target set for his centre.
Responsibility centers may be of the following types:
- Cost Centre: A cost or expense centre is a segment of an organization in which managers are held responsible for the cost incurred in the centre but not for the revenues.
- Revenue Center: A revenue centre is a segment of an organization which is primarily responsible for generating revenue. For example, marketing department of an organization may be classified as a revenue center.
- Profit Center: A profit centre is a segment of an organization whose manager is responsible for both revenues and costs. For example, repair and maintenance department of an organization may be treated as a profit center if it is allowed to bill other production departments for the services provided to them.
- Investment Centre: An investment centre is responsible not only for profits but also for investments made in the centre in the form of assets. The investment made in each centre is separately ascertained and return on investment is used as a basis for judging the performance of the centre.