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Understanding Your Balance Sheet - 4. Control Accounts

Posted on 21 September, 2014 at 23:39
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

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:

  • Trade Debtors
  • Trade Creditors

Potential other Control Accounts are as follows:

  • Cash/Bank Accounts
  • Fixed Assets Cost Accounts
  • Fixed Asset Depreciation To Date Accounts
  • Stock Accounts

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:

  • A sales invoice will be credited to a sales account on the P&L and will be debited to the Trade Debtors account.
  • A payment of an invoice will be credited to the Trade Debtors account and will be debited to the Bank (Cash Book) account.

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:

  • Sales Ledger – Trade Debtors Account
  • Purchase Ledger – Trade Creditors Account, Asset Cost Accounts, Stock Accounts
  • Cash Book – Banking or Cash Account(s), Trade Debtors Account, Trade Creditors Account
  • Fixed Asset Register – Asset Cost Accounts and Depreciation To Date Accounts (generally split across different categories of Fixed Assets)
  • Stock System – Stock Accounts (may be categorised into Raw Materials, WIP, Finished Good etc.)

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.

Manual Systems

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?

  • Trade Debtors - The balance of the Trade Debtors should be the same as the total invoices not yet paid on the Sales Ledger. Often an Aged Debtors Report will be run to get this balance from the Sales Ledger.
  • Trade Creditors  - The balance of the Trade Creditors should be the same as the total invoices not yet paid on the Purchase Ledger. Often an Aged Creditors Report will be run to get this balance from the Purchase Ledger.
  • Cash/Bank Accounts  - Generally a specific Bank Reconciliation will be done first on the Cash Book in order to match the balance of the Cash Book back to the appropriate Bank Statements. There will often be timing differences (particularly if cheques are used) and these should be noted. The accounts on the Balance Sheet should be the same as the Cash Book balance.
  • Fixed Assets  - The balances of the Fixed Asset accounts on the Balance Sheet should equal the total cost of all assets purchased within each category of assets. By the same token, the Depreciation To Date accounts should equal the total sum of all the depreciation to date with each category of asset.
  • Stock  - Whether it be Raw Materials, WIP or Finished Goods, the stock accounts on the Balance sheet should equal the total sum of all the individual items of stock within each category. At year-end a stocktake will generally be undertaken to confirm these totals.  

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.

Categories: Balance Sheet

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