* Schedules are explained in Lesson 23.
The three most common control accounts are:
- Accounts Receivable
- Accounts Payable
- Payroll Liabilities
Notice all three are balance sheet accounts. It is rare but it does not exist in some industries for a control account to appear on the income statement. For the purpose of this lesson I will not discuss income statement control accounts.
In this article I’m going to explain these three particular control accounts and how they are set up. I’ll include some technology issues. In addition, I’m going to illustrate for you two other common uses of control accounts.
Accounts Receivable as a Control Account
Remember the definition for a control account is a single function with multiple third parties (customers, vendors, governmental agencies, projects etc.). So accounts receivable qualifies for a control account, a single function (money owed) with multiple third parties (customers). The value on the trial balance is the cumulative value owed by all customers.
To get into the detail of the account a subsidiary list is generated. There are several different subsidiary reports and I’ll illustrate and explain the two most commonly used.
Summary Balance By Customer
This report usually lists each customer with a balance owed to the company. Customers are in alphabetical order. Review this example:
The summation balance must match the control account balance as reported in the trial balance.
Detail Balance by Customer
A more thorough report used to evaluate customers is the detail receivables report. In a fashion similar to the summation report, customers are in alphabetical order and their respective invoices are in date order. Here is an example:
. Manufacturing and Design Services Inc.
. Accounts Receivable Customer Balance Detail Report
Name Invoice # Date Amount Balance
Hobart Industries 17489 07/17/15 $2,781.40 $2,781.40
. 17502 09/13/15 3,807.10 6,588.50
. 17503 09/13/15 241.60 6,830.10
Quill Carpet 17496 09/02/15 765.85 765.85
Shell Marina 17492 08/30/15 3,707.00 3,707.00
. 17498 09/04/15 2,819.00 6,526.00
Total All Accounts $14,121.95
The purpose of this report is two fold. First it is a tool to reconcile all invoices identifying those that are outstanding and illustrate why some customers are more important than others. Obviously in this case both Hobart Industries and Shell Marina owe Manufacturing and Design Services Inc. a lot of money each.
Both the summation and detailed customer balance totals related to the control account must match the control account balance as reported on the trial balance.
Control Reports with Accounts Payable
This is exactly the same as the accounts receivable control account and the associated lists. The exception here is that instead of customers as the third party, vendors are used. A vendor sends us bills and the company owes money for these various purchases. Similar to accounts receivable the two most common reports are ‘Vendor Summary’ and ‘Detail by Vendor’.
The detail report serves as a tool to reconcile bills due to vendors. Customarily vendors send their customers a customer statement identifying all bills unpaid and recent bills paid. The detail report is reconciled against the vendor’s statement to identify any missing bills. Some industries will divide their accounts payable into two or more control accounts. The following are some examples:
Construction – Contractors often divide their accounts payable into three distinct groups:
- Accounts Payable Suppliers
- Accounts Payable Subcontractors
- Accounts Payable Administration
Any materials purchased are assigned to the suppliers control account; outside labor (subcontractors) are assigned to subcontractors and traditional overhead expenses are assigned to administration.
Service – Service uses two control accounts, one for administrative costs (office supplies, facilities, insurance) and the second for professional outside subcontractors such as professionals, technology firms and labor providers.
Dealerships – Typical dealerships split their payables based on the respective divisions of revenue, new and used auto, another account for parts/service; a third for finance and insurance and the last for traditional administrative costs.
Unlike the private industry, the governmental agencies do not send out monthly customer reports. For this reason we use a separate control account called payroll liabilities.
This particular control account is a little different than the others. You still get a summary report of amounts owed but the detail report is set up differently. Before I continue, if you are not familiar with a simple payroll then please read: Introduction to Payroll.
Payroll has multiple types of taxes due to the same governmental authority as shown below:
Internal Revenue Service
. Form 941 – Federal Withholding
. – Social Security Withheld
. – Medicare Withheld
. – Matching Social Security
. – Matching Medicare
. Form 940 – Federal Unemployment Tax (FUTA)
. Form 945 – Income Tax Withheld for Subcontractors
. – Income Taxes
. – State Unemployment Tax (SUTA)
. – Child Support
. – Tax Liens
. – District Court Orders
This control account and the subsidiary accounts are used to identify obligations associated with the payroll. These tax obligations are recorded to the required reporting forms for the respective taxes. Often other court mandated payments are required and tracked through this control account.
If the employer pays benefits the benefit liabilities are accumulated here too. Almost all benefits are non-governmental third parties. Examples include:
- Retirement Contributions
- Health Insurance Premiums
- Disability Insurance
- Life Insurance
Before I sum up this lesson, I want to illustrate a couple of other examples for the use of control accounts.
In Lesson 17 I teach about parent-child accounts and illustrate with a landscaping/arborist business operation. Within the equipment parent account the two child accounts are large tools and small tools. You can imagine an arborist having upwards of 20 chainsaws, come-alongs, pulley systems, ropes, hand tools and more.
Well small tools is an example of a single function whereby the tools are the multiple third parties. Here small tools could be grouped by function and a separate list of models and serial numbers allows for easy tracking.
Work in Process
Work in process (also known as work in progress, construction in process or contracts in progress) can be set up as a control account. The respective projects are the third parties. There is a single function and so this kind of organization works perfectly with work in process. With this control every cost can be assigned to the respective project allowing the project manager the ability to compare actual costs against estimated costs.
Control Accounts with Accounting Software
Most modern accounting software packages have these control accounts preset in the chart of accounts. Furthermore the software is written restricting your ability to delete these accounts. QuickBooks automatically keys customers to receivables and vendors to payables. When you set up the vendor you are allowed to set the respective control account for this vendor’s bills to get posted.
Control accounts are used when multiple third parties interact with the business in a single function. The three most common control accounts are found on the balance sheet: 1) Accounts Receivable, 2) Accounts Payable and 3) Payroll Liabilities. Modern accounting software automatically includes these three in their preset chart of accounts. Act on Knowledge.
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