Skip to content
Value Investing – Business & Economic Principles
Value Investing - Business & Economic Principles

Guidance and Knowledge for Value Investors

  • Home
  • New Articles
  • Value Investing
    • Membership Program
    • Lessons/Tutorials/Resources
    • Investment Fund
      • Railways Pool
      • REITs Pool
      • Banking Pool
    • Business Ratios
  • Business Principles
    • Business Terminology
    • Start-Up Issues
    • Legal
    • Accounting
    • Human Resources Management
    • Insurance
    • Taxes and Compliance
  • Industry Standards
    • Construction
    • Real Estate
    • Hospitality
    • Food Service Industry
    • Retail
    • Utilities
  • Log-In
  • Take Action
    Take Action

Bookkeeping – Control Accounts (Lesson 22)

Bookkeeping - Introduction and Basic Understanding / By David J Hoare MSA / 01/17/2017 01/11/2021

This site is dedicated to the investment strategy known as Value Investing. There are over 590 articles on this site about business tenets, principles and standards. During 2020, this site’s Value Investment Fund earned a 35.46% return. All of it was documented in the Value Investing Section. If you want to learn about value investing, click on the Value Investing tab in the header above.

When multiple third parties are involved in a single function, a control account is used to process information.

Control accounts are used when there are multiple third parties interacting with the business with regards to a similar function. Control accounts reduce the workload for bookkeeping by using subsidiary accounts or schedules *. The aggregated value is reported as one line of value on the financial report. * 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 exist in some industries for a control account to appear on the income statement. For the purpose of this lesson control accounts for the income statement are not be explained.

In this lesson, only these three particular control accounts and how they are set up are explained and illustrated. There are some technology issues involved. Finally, this lesson illustrates 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.). Therefore, 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. If you listed all the customers in detail on the balance sheet, the balance sheet no longer becomes informative. It is too much clutter for management to understand.

To get into the detail of the account, a subsidiary list is generated. There are several different subsidiary reports and they are illustrated and explained below.

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:

                           Jim’s Janitorial Service                      
Accounts Receivable Customer Balance Summary Report
                                     Date                                        
Name                                                    Amount Owed 
Armory Market                                         $742.00
A-Z Storage                                                210.00          
Becky’s Cards                                             107.00        
Drexall Pharmacy                                       500.00          
Hampton Inn #8715                                 1,240.00          
Merchant’s Tire                                           185.00          
Peterson Dental                                           319.50          
Smith Funeral Home                                   440.50          
Smith Legal                                                   82.50 
Zoe’s Child Development                            206.00         
Total All Accounts                                  $4,032.50        

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
                                                Date

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 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 from 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:

  1. Accounts Payable Suppliers
  2. Accounts Payable Subcontractors
  3. 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 a separate control account called payroll liabilities is used.

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 this lesson continues, if you are not familiar with a simple payroll then please read: Introduction to Payroll on the website businessecon.org.

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
State Government
                       – Income Taxes
                       – State Unemployment Tax (SUTA)
                       – Child Support
Local Government
                       – Tax Liens
                       – District Court Orders

Value investing utilizes a buy low, sell high tenet of systematic processing with buying and selling stock investments. Along with patience, value investors reap substantially greater returns than most of the market measurment indices (DOW, Russell 2000, S&P, etc.). During 2020, this investment fund earned a 35.5% return while the DOW generated a 6.0% return. To date, the Investment Fund is 2.9X the return of the DOW and 2.5X the S&P 500 and the Composite 1500 Index. When you subscribe, you receive access to all existing articles, books, lessons, webinars and reports explaining how value investing works. For more information, click here: Membership Program.

In addition, each week, the subscriber receives additional articles, reports and buy/sell points for high quality stock purchases. Follow along as the fund updates regularly and discover how to invest like a pro and earn excellent returns on your investment.

Subscription ($99.99) is for one year of access to the value investing pool of information and formulas.

REGISTER NOW!

This control account and the subsidiary accounts are used to identify obligations associated with 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

Other Examples

Before this lesson is summed up, there are a couple of other examples for the use of control accounts.

Fixed Assets

Lesson 17 teaches about parent-child accounts and illustrates 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-a longs, pulley systems, ropes, hand tools and more.

Small tools are 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.

Summary – Control Accounts

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.

Value Investing

Do you want to learn how to get returns like this?

Then learn about Value Investing. Value investing in the simplest of terms means to buy low and sell high. Value investing is defined as a systematic process of buying high quality stock at an undervalued market price quantified by intrinsic value and justified via financial analysis; then selling the stock in a timely manner upon market price recovery.

There are four key principles used with value investing. Each is required. They are:

  1. Risk Reduction – Buy only high quality stocks;
  2. Intrinsic Value – The underlying assets and operations are of good quality and performance;
  3. Financial Analysis – Use core financial information, business ratios and key performance indicators to create a high level of confidence that recovery is just a matter of time;
  4. Patience – Allow time to work for the investor.

If you are interested in learning more, go to the Membership Program page under Value Investing section in the header above. 

Join the value investing club and learn about value investing and how you can easily acquire similar results with your investment fund. Upon joining, you’ll receive the book Value Investing with Business Ratios, a reference guide used with all the decision models you build. Each member goes through three distinct phases:

  1. Education – Introduction to value investing along with terminology used are explained. Key principles of value investing are covered via a series of lessons and tutorials.
  2. Development – Members are taught how pools of investments are developed by first learning about financial metrics and how to read financial statements. The member then uses existing models to grasp the core understanding of developing buy/sell triggers for high quality stocks.
  3. Sophistication – Most members reach this phase of understanding after about six months. Many members create their own pools of investments and share with others their knowledge. Members are introduced to more sophisticated types of investments and how to use them to reduce risk and improve, via leverage, overall returns for their value investment pools.

Each week, you receive an e-mail with a full update on the pools. Follow along as the Investment Fund grows. Start investing with confidence from what you learn. Create your own fund and over time, accumulate wealth. Joining entitles you to the following:

  • Lessons about value investing and the principles involved;
  • Free webinars from the author following up the lessons;
  • Charts, graphs, tutorials, templates and resources to use when you create your own pool;
  • Access to existing pools and their respective data models along with buy/sell triggers;
  • Follow along with the investment fund and its weekly updates;
  • White papers addressing financial principles and proper interpretation methods; AND
  • Some simple good advice.

Value Investment Club

Please Signup
*
Username
Username can not be left blank.
Please enter valid data.
This username is already registered, please choose another one.
This username is invalid. Please enter a valid username.
*
First Name
First Name can not be left blank.
Please enter valid data.
This first name is invalid. Please enter a valid first name.
*
Last Name
Last Name can not be left blank.
Please enter valid data.
This last name is invalid. Please enter a valid last name.
Website (URL)
Website (URL) can not be left blank.
Invalid URL
Invalid URL
*
Email Address
Email Address can not be left blank.
Please enter valid email address.
Please enter valid email address.
This email is already registered, please choose another one.
*
Password
Password can not be left blank.
Please enter valid data.
Please enter at least 6 characters.
    Strength: Very Weak

    (Use Cropper to set image and
    use mouse scroller for zoom image.)

    Select Your Payment Gateway
    How you want to pay?
    Payment Summary

    Your currently selected plan : , Plan Amount :
    , Final Payable Amount:
    Submit
    Please follow and like us:
    error
    fb-share-icon
    Tweet
    fb-share-icon

    Post navigation

    ← Previous Post
    Next Post →
    Generic selectors
    Exact matches only
    Search in title
    Search in content
    Search in posts
    Search in pages

    Value Investment Club Log-In

    Value Investing is the Absolute Best Wealth Accumulation Method.

    Value investing is a systematic process of buying stock at low prices and selling once the stock price recovers. Its foundation is tied to four principles:
      1) Risk Reduction
      2) Intrinsic Value
      3) Financial Analysis
      4) Patience
    Learn about value investing and gain access to lucrative information that will improve your wealth. Expect annual returns in excess of 20%. The investment club’s results during 2020 were 35.4% and year-to-date for the second year it is tracking well over 43%. Lifetime to date, the Fund is 2.9X the return for the DOW and 2.5X the S&P 500.

    Membership Subscription

    Log In

    Please log into the site.

    • Login
    • About the Author
    • My Services
    • Contents
    • Resources
    • Sitemap
    • Privacy Policy
    Value Investing is the Absolute Best Wealth Accumulation Method.

    Value investing is a systematic process of buying stock at low prices and selling once the stock price recovers. Its foundation is tied to four principles:
      1) Risk Reduction
      2) Intrinsic Value
      3) Financial Analysis
      4) Patience
    Learn about value investing and gain access to lucrative information that will improve your wealth. Expect annual returns in excess of 20%. The investment club’s results during 2020 were 35.46%. The investment fund outperformed the DOW by a factor of 2.9X, 2.5X the S&P 500 and 2.5X the S&P Composite 1500.

    Membership Subscription

    Categories

    Archives

    Copyright © 2021 Value Investing - Business & Economic Principles | Powered by Astra WordPress Theme

    Login

    Forgot Password?

    Insert/edit link

    Enter the destination URL

    Or link to existing content

      No search term specified. Showing recent items. Search or use up and down arrow keys to select an item.