What is the difference between Business Area, Profit center & Profitability Segm

ent?
Business area is an organisational unit which corresponds to the specific busine
ss segment or area of responsibility. Identification of business area helps in s
egment reporting of a company in its financial statements. Business areas can be
identified based on the products of the company or based on geographical area.
Profit centers are internal areas of a company that have the responsibility for
achieving target profits or productivity goals.
The objective of business area is more for reporting purposes whereas profit cen
ter allows to analyse areas of responsibility and to delegate responsibility to
decentralised units (eg., the various divisions within a company). Thus, profit
center are basically treated as "companies within a company" and ensures effecti
ve control.
Profitability Segment corresponds to market segment. The market segments can be
defined as products, product groups, customers, customer groups, geographic area
s, etc. For example, a company may wish to analyze profitability for a specific
group of products that the company sells to a particular customer (or group of c
ustomers). When setting up CO-PA, the company will have broad flexibility to cho
ose whichever characteristics are relevant for defining the company s market segme
nts. Each unique combination of characteristic values (e.g. sales of product A t
o customer X) defines a profitability segment.
Difference between Profit Center and Business Area
Business area will have many profit centers. For example Vehicle is a business a
rea in a company. Vehicle can be cars and Bikes etc. Here Vehicle is business ar
ea and Cars and Bike are profit centers. In broad Vehicle is a profit center. Bu
t as it has sub areas those are profit centers. So profit centers cannot be repl
aced with business area and vice versa. We can replace business area by Profit c
entre, only condition is that it should be in same controlling area. The busines
s area is more like a business unit of a company. You can have multiple profit c
enters within a business area.
Main distinguish factor is that distribution and assessment in possible in profi
t center but not in business area.
One more distinction is that Business area need not be attached to any organisat
ion structure. But profit centres can be created only under the controlling area
. Business area can be across controlling area.
Business area concept is used for making strategic decisions by the management w
hereas the primary purpose of profit centre accounting is responsibility account
ing.