ABSORPTION ACCOUNT Meaning and
Definition
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An absorption account is a term used in accounting that refers to an account created to record the allocation of costs among two or more related entities or divisions within a company. It is primarily used in situations where a parent company has multiple subsidiaries or divisions, and the costs incurred by the parent company need to be allocated appropriately among these entities.
The purpose of an absorption account is to track and allocate costs fairly between divisions or subsidiaries based on their level of usage or benefit derived from the resources provided by the parent company. This allows for a more accurate reflection of the financial performance of each division or subsidiary.
The process of allocating costs to absorption accounts involves identifying the costs incurred by the parent company that are common to multiple divisions or subsidiaries. These costs can include overhead expenses such as rent, utilities, and administrative costs. The allocation is done using a predetermined basis, which can be based on factors like sales, production volume, or direct labor hours.
By using absorption accounts, companies are able to better assess and evaluate the profitability and performance of each division or subsidiary. This information is crucial for making informed business decisions, such as resource allocation, investment evaluation, or strategic planning.
In summary, an absorption account is a specialized accounting tool used to allocate costs appropriately among multiple divisions or subsidiaries of a parent company. It helps provide a more accurate representation of the financial performance of each entity, aiding in decision-making and resource management.
Etymology of ABSORPTION ACCOUNT
The term "absorption account" does not have a specific etymology as it is a combination of two words.
- "Absorption" comes from the Latin word "absorbere", which means "to swallow up" or "to take in". In this context, the word refers to the process of absorbing or taking in costs incurred by a department or division of a larger organization.
- "Account" has its roots in the Latin word "computare", meaning "to calculate". It refers to a financial record or statement that tracks the inflow and outflow of money or resources.
Therefore, "absorption account" is a combination of these two terms and refers to a financial account that captures the costs or expenses incurred by a department or division within an organization.
