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Responsibility Accounting: Benefits & Limitations

Responsibility Accounting: Benefits & Limitations
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  • 0:02 What Is Responsibility…
  • 0:41 Benefits
  • 1:40 Limitations
  • 2:56 Lesson Summary
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Lesson Transcript
Instructor: Kevin Newton

Kevin has edited encyclopedias, taught middle and high school history, and has a master's degree in Islamic law.

Unlike other accounting systems which focus on departments or divisions, responsibility accounting tracks the performance of each individual. As you might imagine, this has unique advantages and disadvantages.

What Is Responsibility Accounting?

One of the biggest assets that a company has is its people. Effective employees and managers are worth several times more than their salaries and benefits. As you might expect, the ability to have some sort of accounting system to track these performers is, therefore, not only useful from a financial perspective but also to aid in managing talent. That is exactly what responsibility accounting does. Rather than focus solely on monolithic entities like Legal or HR, responsibility accounting tracks expenses and revenues through individual managers and the areas that they supervise.

Benefits

As you might imagine, responsibility accounting has some pretty considerable advantages all around. First of all, it allows for upper management and accountants to gain unique insight into how resources and information move around an organization. With other systems, different departments are walled off. However, with responsibility accounting, different departments are linked to each other in organizational chains.

Additionally, there are incredible HR benefits. For example, talented managers can be identified earlier because responsibility accounting includes reports from all levels of management on up. Therefore, a standout employee whose immediate supervisor may not recognize as having great potential can be seen by others in the company.

Finally, responsibility accounting provides a level of timely accountability to the company. Reports for each manager have to be prepared every month. These show how efficiently the manager handled their section of the company, and they're then aggregated up to the highest levels of management.

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