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.