Responsibility accounting is one of the types of methods responsible for measuring the entire allocation of budget, the effectiveness of management, and internal accounting of an organization. The main aim of this accounting system is to maintain and support all scheduling, costing, various divisions, and entire responsibility centers of business.
The main objective of responsibility accounting is to take account of responsibility centers. A responsibility center is an internal operating system of a business, that is accountable for all the actions and tasks outlined for a particular unit. Each center has its aim, intentions, policies and plans, staff and financial reports. These centers are responsible for all the expenses incurred, revenue generated, and funds invested in an employee.
So primarily, the responsibility accounting accumulates the reports planned earlier and the actual accounting data, including the inputs and outputs of the particular responsibility centers. In short, responsibility accounting is a tool to measure a unit and an individual’s performance.
These centers are divided into four different centers namely:
- Cost centers – It is a branch or a unit which manages, allocates, separates, and eliminates all cost-related report of a company.
- Profit centers – It is responsible for initiating and supervising revenue. This unit does not have any authority over the investments and expense or investment but monitors a few expenditures in the marketing section.
- Revenue centers – This department reports all the calculation related to only profit based on expenses and revenues.
- Investment centers – It acknowledges both expenditures and revenue.
Requisites of Effective Responsibility Accounting
For a compelling performance of responsibility accounting, below-mentioned are a few points that should be taken into consideration.
- Clear Understanding – To have a well-established organisational structure, a company’s management at all levels should be well aware of their responsibility, the company’s purpose and the goal.
- Performance Evaluation – It is important to follow clear and standard measures to evaluate each individual’s performance and contribution.
- Ownership Transparency – All managers should be evaluated according to the aspects that are directly under their influence. The manager should not be judged based on things that are not under their control.
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