The classic example is payables. At any given moment the business may owe several different vendors different sums of money. To keep the reports simple, the balance sheet has a control account called Accounts Payable with a summation of all the individual vendor balances. These unique sub-accounts are called ‘Subsidiary Accounts’. Businesses use various identifiers for the subsidiary accounts. Some will use a numbering system; others use the vendor name while others may use a function name such as ‘Rent’ and ‘Insurance’.
The following is a short list of control accounts typically found in accounting:
- Accounts Receivable – it is very common to have several different customers owing the business money. These unpaid invoices are controlled via accounts receivable.
- Work in Progress – sometimes referred to as construction in process in the construction industry, this account has a project identification number assigned to the various projects that are ongoing in the company. When the project is complete, the debit values are transferred to Costs of Sales section of the profit and loss statement along with the corresponding contract revenues earned.
- Accounts Payable – illustrated above
- Payroll Liabilities – when employees are paid, this account sums up the various tax liabilities, garnishments, accrued time off in dollars, third party payments due, accrued retirement etc.
- Common Stock – each shareholder is assigned an identifier and that respective shareholder’s value is kept here until sold. Any capital paid in excess of par value is accumulated in a separate equity section account however it isn’t assigned to any unique shareholder within that account.
If you haven’t noticed, all the above control accounts are balance sheet related. Income statement related control accounts are rare to nonexistent except in unique industries. The reason for this is that in general there is no need to accumulate values for respective individuals, vendors, employees, etc. on the income statement.
Often business owners confuse control accounts with summation accounts. There is a difference. Control accounts sum up the values related to different functions of the business. Summation accounts are similar but they don’t organize the respective sub-accounts by name or function but organize data based on some GAAP related principle. For example, Fixed Assets sum up the different types of fixed assets; you may have real estate in one subaccount, equipment in another, office technology in another and so on. It is irrelevant who made the items or where they were bought; the key is the type of equipment.
One last term for you to understand related to Control Accounts. This is a Subsidiary Account. These are the actual names or unique identifiers associated with the different functions of the business operation. In receivables, the typical subsidiary account is the customer’s name, in payables it is the vendor’s name; with common stock, it is the shareholder’s name.
Finally, it is important to explain about the accounting software out there. The two most commonly used small business software are QuickBooks and Sage. Both have this system built into Accounts Receivable and Payables accounts; i.e. they act as control accounts automatically. If the user desires to have an account as a control account, both software allow the user to trigger the account as a control account when creating the account; you merely click an indicator in the setup process.
Oh yeah, one last item. If you look at your Trial Balance, many TB reports indicate if the particular account is a control account. Be on the lookout for this the next time your look at your TB. Act on Knowledge.
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:
- Risk Reduction – Buy only high quality stocks;
- Intrinsic Value – The underlying assets and operations are of good quality and performance;
- 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;
- 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:
- 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.
- 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.
- 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.