What is passive accounting?

Liability accounting is an internal system used to better control costs and performance. Its primary focus is to hold individual managers accountable for the elements of a company's performance that they can control. In most cases, liability accounting does not affect a company's public accounts.

The idea of ​​liability accounting is to address the problem that it can be difficult to judge individual company departments on their profitability alone. For example, if a company has a team of traveling sales representatives, they may have a separate travel department that organizes their travel and accommodations. In most cases, this department will only spend money and not directly generate revenue. While travel arrangements can be a vital part of the sales process, it is likely that sales revenue will be recorded in the accounts of a separate department.

In liability accounting, each department will have defined goals. The relevant manager will be judged on how well they meet these objectives. This is similar to most target systems, but generally works by measuring on a financial basis. The important distinction is that this financial assessment will not necessarily be a pure measure of profitability.

In most liability accounting systems, each department falls into one of four categories. A cost center will only be judged by how low it keeps spending; the travel department in the above example would fall into this category. A revenue department like the sales team will only be judged on the revenue it generates. A profit center will be judged based on standard profit or loss. This may apply to individual stores in a chain.

The last category is an investment center. This can literally involve financial investments, but it can also encompass departments involved in long-term projects. Departments in this category are generally judged using a long-term view that takes into account issues such as capital expenditures, where the resulting revenue will not all be collected in the first year.

In general, liability accounting is a purely internal measure. It is possible that the details of its operation and results could be included in a company report, for example, as information to detail the changes that a company has made. These details would only be used as a way of sharing information with investors and potential investors. The details are generally not part of the mandatory financial information that a company must include in its public accounts.