What is a profit center?

Definition

A profit center is a part of the business the books track for both what it earns and what it spends. On the books, this is a slice of the Income Statement with revenue and costs on the same read.

A three-truck catering company can treat wedding jobs, corporate lunches, and the cafe counter this way. Each slice shows its own sales and the costs that belong to those sales.

It is a label on a slice, not a ledger account you debit. Catering invoices and food cost still post to the usual accounts; this label only groups them.

Accrual books still use earned sales and incurred costs, even if cash has not moved. A cash-basis reading can shift the same leftover into a different month.

Where it shows up

P&L: Related to a slice of the Income Statement that has both revenue and cost.

Cash flow: Related to that slice's profit, which is not the same as its cash.

See also: Departmental P&L · Cost Center · Contribution Margin

When you look at your Income Statement, this slice is a mini P&L for one line of work. Wedding jobs show banquet sales on top and food, labor, and rent on the way down.

When the leftover is high, that line of work kept more after its own costs. When it is low, food cost rose, labor ran long, or sales were light.

The Balance Sheet does not print this label as its own line. Unpaid wedding invoices and food bills still sit in the company books.

On the Statement of Cash Flows, this leftover is not its own section. A profitable wedding week can still be waiting on a deposit that has not cleared.

A departmental P&L is the report that can show these slices side by side. This label is the kind of slice that has both sales and costs.

Operating income can be read on the slice before interest and tax. The company total is still the sum of the slices after shared costs have been assigned.

How it works

Someone assigns a department or product-line tag to the sales and cost accounts that belong to that work. At month-end, the report groups those tagged lines into one leftover.

Sales land first. Food, labor, and other costs that belong to those jobs come out next.

• Tag sales and costs to the line of work.
• Group tagged lines into one leftover at month-end.
• Subtract variable costs first, then any fixed costs assigned to the slice.
• Read the leftover as that line of work's profit, not cash in a separate account.

Contribution margin on the slice is sales minus the costs that move with those sales. The full leftover also subtracts any fixed costs assigned to that slice.

Shared costs such as the commissary kitchen may be assigned onto these slices. Overhead allocation is that assignment; this page stays on the profit-center idea, not on the split method.

Stay with the leftover from that line of work when you read the slice. A strong wedding leftover can sit next to a cafe counter that barely covers its wages.

Do not treat the leftover as cash in that truck's envelope. Wedding jobs can look profitable while the client has not paid the balance.

A cost center is the opposite read: costs and no sales line. HR or the dish room can sit that way while the three trucks sit as profit centers.

Example

Three Plates Catering runs wedding jobs, corporate lunches, and a cafe counter off the same kitchen. June is the month we will read.

Wedding jobs post $40,000 of banquet sales. Food, service wages, and florist fees that belong to those jobs come to $22,000, so the slice leftover is $18,000.

Corporate lunches post $18,000 of sales and $14,000 of food and driver wages. That slice leftover is $4,000.

The cafe counter posts $9,000 of walk-up sales and $8,200 of pastry cost and counter wages. That slice leftover is $800.

The $18,000 wedding leftover is the profit-center read for that line of work. It is not $18,000 sitting in a wedding-only bank account.

If wedding food cost had been $2,000 higher, that slice would show $16,000. Corporate and the cafe would not have to change for the wedding leftover to move.

Common mix-ups

A profit center is not a cost center. A cost center tracks spending only; this label tracks both sales and costs.

A profit center is not a departmental P&L. A departmental P&L is the report that can show these slices; this label is one kind of slice on that report.

A profit center leftover is not cash. A strong wedding slice can still be waiting on a final invoice.

Related terms

• Departmental P&L: An income statement split by department, location, or product line.
• Cost Center: A part of the business tracked for its spending rather than its profit.
• Contribution Margin: Revenue minus variable costs, showing what is left to cover fixed costs.
• Operating Income: Profit from core operations before interest and taxes.
• Overhead Allocation: The method for spreading indirect costs across products, jobs, or departments.
• Chart Of Accounts: The organized list of every account used to record transactions.
• Budget Versus Actual: The comparison of planned amounts to what actually happened.
• Account Roll-Up: How detailed accounts summarize into the lines shown on a statement.