To help you fully understand what a parent-child accounting organization is I’ll first explain the basic principle. Then I’ll explain the difference between a parent-child structure and a control account. After this I’ll provide several examples. Finally I’ll present the best reasons and groups to use this type of accounting organization.
Parent-Child Account Explanation
The goal of bookkeeping is to record economic transactions to journals and transfer this information to an organized set of ledger accounts (chart of accounts). The result is an understandable trial balance.
There are instances though where some clarity is required due to extenuating circumstances. There could be multiple sites or functions of business requiring their own set of accounts. Think of retail with several stores. It would benefit the business owner to know how well one store is performing over the others. If all the stores reported their activity to a single sales account then it becomes difficult to assess performance by store.
However, if sales are recorded to sub-accounts of retail you can get both per store activity via child accounts and aggregate sales in the parent account. Look at the two illustrations below; which is better?
Now for a little presentation understanding. Most trial balance reports identify the parent account first and the aggregated value then the corresponding child accounts immediately underneath and their individual balances.
When preparing reports the income statement can be presented in two different formats. The first is a collapsed version whereby the reader only sees one value for retail sales. The alternative is the expanded version mode whereby the reader sees the sales for each store and the aggregated value too. See the illustration above.
Difference Between Parent-Child and Control Accounts
The parent-child account organization is designed to separate several functions, locations or third party accounts.
In accounting there is another accounting organization that is similar called control accounts. Control accounts however have a distinct function and a long list of third party participants. Think of accounts receivable or payables – one function, lots of customers or vendors. Another control account example is payroll liabilities, again one function, lots of third party payees.
To assist you in grasping the parent-child configuration let’s look at some examples.
Examples of Parent-Child Accounts
The most common parent-child account is cash. Cash is held in the company in multiple spots or bank accounts. Here are some examples:
- Petty Cash
- Operating Bank Account
- Payroll Bank Account
- Held Deposits
- Till Box Cash
I’ve seen the organization of cash broken out by bank accounts and locations like this:
Petty Cash $ZZZ
Store ‘A’ Z,ZZZ
Store ‘B’ Z,ZZZ
Wells Fargo #4265 ZZ,ZZZ
Wells Fargo #9753 ZZ,ZZZ
Payroll Checking (Wells) Z,ZZZ
Savings – Wells #0713 ZZ,ZZZ
Total Cash $ZZZ,ZZZ
In this example both till cash and operating checking are parent accounts.
Another example is over on the income statement. I like using parent accounts for both facilities and insurance. Let’s take a look:
CAM Fees Z,ZZZ
Other Lease Z,ZZZ
Total Facilities $ZZ,ZZZ
General Liability ZZ,ZZZ
Total Insurance $ZZ,ZZZ
Don’t forget, this is the trial balance presentation and if presented on the income statement in the expanded mode, the total would be at the bottom and in a separate column.
Best Uses of the Parent-Child Organization
One of the more common errors for bookkeepers is creating too many accounts for the books. I’m a big believer in simplicity. When an owner reads his financial statements they tend to want the information in summation (collapsed) format. They would prefer one line of information as illustrated above with the facilities than fine lines of more detail. The same goes for cash.
The parent-child organization condenses the presentation opportunity for management but allows for expanded mode for accountants and analysts. In addition when management makes inquiries about the total, the expanded mode assists them in understanding the financial report.
My experience has taught me that the following reasons are the best for using parent-child accounts. I’ll start with the balance sheet groups and then the income statement groups:
- Cash – often several accounts
- Escrow – usually cash accounts held in different bank accounts
- Inventory – raw resources, assemblies, retail floor, held for future sale (seasonal)
- Investments – different types of accounts with third parties
- Fixed Assets – only if multiple groups of a similar purpose (see below)
- Credit Cards – summation of several different cards
Income Statement (Profit and Loss Statement)
- Sales – very useful if several locations or product lines
- Cost of Sales – divide out materials, labor, subcontractors, outside services, etc.
- Facilities – as explained above
- Insurance – as explained above
- Utilities – if you elect to separate from facilities you could sum up electricity, gas, water, sewage and specialized services
- Communications – various cell and landline systems, you could include Internet
- Office – technology, supplies, postage, outside services
Now for a little advance bookkeeping.
I endorse the use of parent-child accounts and control accounts with fixed assets. This is extremely beneficial to equipment intensive operations like site developers, miners and manufacturing. Let’s use the landscaper/arborist for this example. Here is a business with several trucks, trailers, equipment and tools. As an owner he is mostly interested in three major lines of information:
Let’s assume he has seven trucks. As a bookkeeper I would set the transportation account up as a control account with each truck listed as a separate item; just like customers in receivables. However in equipment there are trailers for hauling and some heavy equipment like lifts, bobcats, stump grinders and so on. You could simply make equipment a parent-child account setup with two child accounts. One is for trailers and the other is for power equipment. Both trailers and power equipment can be set up as control accounts with a list of trailers and a list for equipment.
The tools account line can easily work as a control account with the respective tools in an item list. These tools would include chain saws, augers, pulley systems etc.
This configuration solves both the needs for reporting simplicity and the requirement of detail for inventory and asset protection.
The parent-child account format allows for a simpler presentation format for both primary financial statements while still retaining appropriate details for accountants and management inquiries. It is used when one account has several functions or locations.
Don’t confuse control accounts with parent-child accounts. Although they appear similar, control accounts are used with a single purpose and multiple third parties. ACT ON KNOWLEDGE.
If you have any comments or questions, e-mail me at dave (insert the usual ‘at’ symbol) businessecon.org. I would love to hear from you. If interested in my help as an accountant or consultant, contact me through the ‘My Services’ page in the footer.