This is the 4 in a series of posts that have the aim of helping you, the business owner, to better understand your Balance Sheet so that you can use it to work for your business.
So far we have looked at all the categories of accounts that make up a Balance Sheet. However, within these categories of accounts there are certain accounts that “look after” details from other ledgers. These are called ‘Control Accounts’ and we will now look at these in more detail.
Control accounts are identified as those accounts on the Balance Sheet whose transactions are “controlled” by other ledgers.
The majority of Balance Sheets will have at least two Control Accounts. Whether there are more than this will depend on the other ledger modules that an accounting system has access to and also whether a business has assets, stock etc.
The two usual control accounts that most companies will have are:
Potential other Control Accounts are as follows:
Understanding Definition of Control Accounts
I defined a Control Account as being an account ‘whose transactions are controlled by another ledger’. In order to better understand this let us look at the Trade Debtors Account.
The Trade Debtors Account on the Balance Sheet represents the balance of ALL outstanding sales invoices. You don’t see the different customer balances on the Balance Sheet, just the total of all the customer balances.
So how does it work?
Every time that a new sales invoice is generated by, or entered into, the sales ledger the customer balance on the sales ledger is debited. Conversely, every time a customer pays an invoice, the customer balance is credited.
Now, these transactions, both the sales invoice and the payment of a sales invoice, are also posted to the appropriate Profit & Loss Account and to the Balance Sheet accounts:
Depending on your accounting system this will either happen in real time, or it will happen when the Sales Ledger is rolled over at month end. Either way the postings to the “Control Account”, the Trade Debtors account, will happen automatically. The postings are “controlled” by the Sales Ledger.
Control Accounts Ledgers
As mentioned, postings to Control Accounts are generally “controlled” by the ledgers to which they relate. The list of potential “ledgers” (or Modules attached to an accounting system) and the Control Accounts that they generally control or feed postings into is therefore as follows:
Manual / Journal Postings
When Control Accounts have Ledgers (and/or Accounting Modules) attached to them there should usually be NO manual or journal postings to these accounts. This is because these accounts need to have the same balances as the ledgers that control them. A posting to one of these accounts that was not done via the appropriate ledger would change the balance on the Control Account without changing the ledger balance. This would therefore cause a discrepancy between the two.
Some accounting systems have been designed so that they will not allow you to code/post an entry directly to a Control Account. Unfortunately some systems do allow direct postings to these accounts so you need to ensure that you do not inadvertently do so.
Of course, if you don’t have the appropriate ledgers or modules, for example, you did not have a Fixed Asset module, then you can post directly to appropriate accounts.
It all works slightly differently if you do your accounts manually, or do not have certain ledgers or modules, but the principles remain the same.
You will still have and use Control Accounts for Debtors, Creditors, Assets, Stock etc. After all, you still don’t want to have a separate Balance Sheet account for every single customer or supplier, asset or piece of stock.
The difference with a manual system would be that you would back up all entries posted to a Control Account with a manual ledger. This would often be kept on a spreadsheet.
So, for example, a lot of companies would have Sales and Purchase Ledgers but would not have a Fixed Asset module attached to their accounting system. The cost of each asset would therefore be coded/posted directly to the appropriate Fixed Asset cost account. The assets details (description, date of purchase, cost etc.) would then be entered into a spreadsheet.
Reconciliation of Control Accounts
I will be looking at Balance Sheet Reconciliations in detail in my next blog post so for the purpose of this post we will just be looking at how the Control Accounts should be agreeing with the appropriate Ledgers/Modules.
As already mentioned, the Control Accounts should have the same balances as the Ledgers/Modules that control them.
So exactly what balances on the ledgers should you be looking at?
Hopefully I have now been able to give you a good understanding of Control Accounts.
Next week – Balance Sheet Reconciliations.
As with all my blog posts, please let me know if you have any queries.