Bookkeeping – Parent–Child Accounts (Lesson 17)

A parent account is the summation of the respective child account values.

When one account is fed information from several sources based on function or location, this account is referred to as a ‘Parent’ account. The sub accounts are called ‘Child’ accounts. Some of the older accountants within the accounting profession still use the archaic term of master-slave; but the profession recognized its improper origin and now advocates using the parent-child term. Some technology (accounting) programs still use the term ‘Master’ account.

To help you fully understand what a parent-child accounting organization is you need to understand the basic principle. Continuing on, you will need to know the difference between a parent-child structure and a control account. Once the difference is explained, this lesson will provide several examples. Finally, the best reasons and groups to use this type of accounting organization with are illustrated.

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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?

Traditional
Retail Sales $ZZZ,ZZZ

Parent-Child Structure
Retail Sales:
Store ‘A’        ZZ,ZZZ
Store ‘B’        Z,ZZZ
Store ‘C’       ZZZ,ZZZ
Total Retail Sales $ZZZ,ZZZ

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
Savings

This is an illustration of cash broken out by bank accounts and locations organized like this:

CASH
     Petty Cash $ZZZ
     Till Cash:
Store ‘A’     Z,ZZZ
Store ‘B’       Z,ZZZ
         Sub-Total Till Cash – Z,ZZZ
     Operating Checking:
         Wells Fargo #4265        ZZ,ZZZ
         Wells Fargo #9753          ZZ,ZZZ
          Sub-Total Operating Accounts – 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. Using parent accounts for both facilities and insurance is common. Take a look at this illustration:

     Facilities:
            Rent $ZZ,ZZZ
            CAM Fees    Z,ZZZ
            Maintenance Z,ZZZ
Utilities Z,ZZ
    Other Lease    Z,ZZZ
Total Facilities $ZZ,ZZZ
     Insurance:
Property Z,ZZZ
            General Liability ZZ,ZZZ
            Professional    ZZ,ZZZ
            Umbrella    Z,ZZZ
Bonding Z,ZZZ
Total Insurance $ZZ,ZZZ

Best Uses of the Parent-Child Organization

One of the more common errors for bookkeepers is creating too many accounts for the books. Simplicity is far superior. When an owner reads his/her 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 five lines of more detail. The same goes for cash.

The parent-child organization condenses the presentation as desired by 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 results.

My experience has taught me that the following reasons are the best for using parent-child accounts.

Balance Sheet

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 illustrated above
Insurance – as illustrated 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.

Use both 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:

Transportation
Equipment
Tools

Let’s assume he has seven trucks. As a bookkeeper it is best to 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.

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