PROFIT CENTER

According to the definition of investopedia, a profit center is a branch or division of a

company that directly adds or is expected to add to the entire organization's bottom line. It is
treated as a separate, standalone business, responsible for generating its revenues and earnings.
Its profits and losses are calculated separately from other areas of the business. Peter Drucker
coined the term "profit center" in 1945. Profit centers are crucial in determining the most and
least profitable department of the business. Management needs to have accurate information to
make effective decisions. It is considered as a pressure for division managers because they
needed to outweigh the cost to ensure that unit that generates revenue in excess of costs.

Since managers of the subunits need to be greater than the cost, they might manipulate
the data to show in their financial statements that they generate higher profit than they incurred
costs. With this, auditing financial statements is needed in order to make sure that managers are
transparent in making the financial statement of the company. Profit centers make managers
more concerned with finding ways to increase the center’s revenue by increasing production or
improving distribution methods. Thus, the auditor needs to evaluate properly the data and
determine whether the information in the financial statements is presented in conformity with the
generally accepted accounting principles.