What Is a Segment?

A segment is a component of a business that generates its own revenues and creates its own product, product lines, or service offerings. Segments typically have discrete associated costs and operations. Segments are also referred to as "business segments."

Usually, if a unit of a business can be cleanly and self-sustainably separated or lifted out of the company as a whole, it satisfies the criteria of being classified as a business segment. Financial information should be available for each separate segment's activities and performance.

Furthermore, each individual segment is traditionally periodically reviewed by the company's management before a decision can be made regarding the amount of capital that will be allotted to it, for a particular operating period.

Understanding Segments

A business segment is a portion of a business that generates revenue from selling a product or a line of products, or by providing a service that is separate from the main line of focus for the business. For accounting purposes, FASB's SFAS 131 is the definitive source when it comes to accounting practices involving segments.

Key Takeaways

  • A segment is a term used to describe a component of a business that generates its own revenues and creates its own product or product lines.
  • Segments typically have their own discrete associated costs and operations.
  • Usually, if a unit of a business can be cleanly and self-sustainably be carved out of the entire company, it may be classified as its own segment.

Example of a Segment

For example, XYZ Corporation makes widget presses. After years of sticking to this core product output, it decides that it can very easily use the widget presses to manufacture the actual widgets, as well. If the company successful produces widgets and gets them on store shelves for retail consumption, then the widget division may be viewed as its own business segment, because it generates its own revenue and incurs its own expenses.

Another tell-tale sign that a company has siloed a function as its own segment, it that its sales figures do not directly impact the profitability of business' the core operations. In this case, if widget sales fizzle, but the sales of the widget presses climb, then the widget arm can justifiably be deemed to be an autonomous segment.

Keep in mind that not every component of a company constitutes a segment. For example, XYZ Corp.'s marketing division would not be considered a segment because it does not perform operations that directly earn revenue.

Real-World Example

Apple Inc. is well-known for manufacturing phones, tablets, computers, music players and many other items. Each of these areas may be considered to be its own segment. This is helpful in enabling Appleā€™s management to determine which area is enjoying the most success, and which areas are showing sluggish sales figures. The company can then adjust its marketing, and research and development efforts accordingly, in a bid to stimulate overall company profitability.

[Important: A company may segment its business by region. For example, the aforementioned Apple Inc. has one silo for North and South America, another for Europe that includes all European countries, the Middle East, and Africa, and still another separate segment just for Japan.]