Focus video player for keyboard shortcuts
Auto
- 720p
- 540p
- 360p
1.00x
cc
- 0.50x
- 0.75x
- 1.00x
- 1.25x
- 1.50x
- 1.75x
- 2.00x
We hope you enjoyed this lesson.
Cool lesson, huh? Share it with your friends
About this lesson
Understanding Revenue with the use of Control Accounts.
Exercise files
Download this lesson’s related exercise files.
Revenue Part 2 - Control Accounts90.5 KB Revenue Part 2 - Control Accounts
86.9 KB
Quick reference
Revenue Part 2
Understand the use of Control Accounts.
When to use
When constructing a basic financial model.
Instructions
A control account is no more than a reconciliation of how a balance sheet varies from one period to the next.
- Assuming the last period’s Balance Sheet accounts receivable number was $120,000, the Balance Sheet cannot help but balance if we show:
- a P&L Sales figure of $64,700
- a cash receipt of $82,740 in the Cash Flow Statement
- re-state the receivables balance to $101,950 on the Balance Sheet
- 00:04 It's step back in time time now.
- 00:07 I'm going to look at control accounts again just to remind us
- 00:11 what we actually need to understand about a control account.
- 00:14 You recall It actually starts and ends with a balance sheet item.
- 00:20 Brought forward means brought forward from the previous period.
- 00:23 Carried forward means continued to the future period.
- 00:26 But they are two consecutive periods of a balance sheet item.
- 00:30 Typically, the items in the middle come either from the income statement or
- 00:35 the cash flow statement.
- 00:36 Not always, it can be a balance sheet item, but more on that when we get to tax.
- 00:41 For the time being, it's pretty straightforward.
- 00:45 Now, this tells us various things.
- 00:47 It tells us what our opening balance was, it tell us what our closing balance is.
- 00:51 And therefore, our movement in between, but it also tells us the relationship.
- 00:56 Because our previous period balance is just the calculation for the control
- 01:00 account from the period before, we've only got three calculations to do.
- 01:04 And this gives us our first rule, if you remember.
- 01:08 Count the number of rows in a control account, subtract one.
- 01:12 And that's how many calculations you need to do in order to get the balance sheet to
- 01:16 balance.
- 01:18 Number two, the number two rule is, what order to do them in?
- 01:23 Always ignore row one, so you would model sales first and
- 01:28 put that in the income statement.
- 01:29 You show cash receipts as a positive number.
- 01:32 Don't forget your brain here,
- 01:34 we need to remember that, In the actual cash flow statement.
- 01:38 And then the balance sheet item would be the balance of figure at the bottom.
- 01:43 If you put those numbers in, it's got to balance, the end, gotta balance.
- 01:47 And the third of the three things our control account tells us is that sales,
- 01:51 the line two item, is the key driver.
- 01:54 So if there's no sales, in the end, there'll be no cash receipts.
- 01:58 And with no movement, there can't be any continuing earnings.
- 02:03 Let's go finish off our modeling example.
- 02:07 So here in this example,
- 02:09 we've just got to the control account down in rows 33 to 38 of our model.
- 02:16 What I've actually got to put in now is
- 02:20 put these numbers into the financial statements which I've derived here.
- 02:24 So how many calculations do I have to do?
- 02:28 Well, all together there's four rows, so
- 02:30 by the rules we had before, that means I've got three to do.
- 02:33 I've got to put revenue into the income statement.
- 02:36 I've got to put cash receipts as a positive number
- 02:39 into the cash flow statement.
- 02:41 And I've got to put my closing receivables, my debtors,
- 02:44 into the balance sheet.
- 02:45 If I put those numbers in, because this was my opening balance.
- 02:49 I'm going to actually have this work, it's got to work, the end.
- 02:53 Now normally when you're doing accounting,
- 02:55 you've always been told about good old double entry.
- 02:58 And you think you've got to do an even number of calculations to actually get
- 03:01 something to work.
- 03:02 But look, here we've only got three to do and it will work.
- 03:06 So let's not get confused, let's get on with it.
- 03:08 So do them in the order that we're supposed to.
- 03:10 So revenue first goes into the income statement.
- 03:13 Remember, always link your numbers to the control account.
- 03:16 So if it doesn't balance for
- 03:17 some reason, you can trace your control accounts to see where you went wrong.
- 03:21 So let's go to the income statement, revenue goes into row 13 here.
- 03:25 Such a complicated calculation, equals.
- 03:29 Go back to my calculations, there's my revenue, press Enter, copy across.
- 03:34 Do you see, as soon as I did that, my error check went berserk?
- 03:38 If I click on this, my balance sheet doesn't balance, if I look.
- 03:42 Absolutely my net profit after tax is going up and
- 03:45 there is no corresponding adjustment in net assets.
- 03:48 It's warning me, and that's right, but you know what?
- 03:51 I want the error check to do this.
- 03:52 Because if it hadn't gone off,
- 03:54 that would mean there'd be something wrong with how I've done my subtotals.
- 03:57 And it wasn't flowing through or linking correctly.
- 03:59 So I'm actually using this error check the wrong way round.
- 04:03 I want it to show I've got an error at this point in time, that's good.
- 04:09 Right so let's go back to my calculations, I've done the first line item.
- 04:13 What I'm going to do now is I'm going to go to the second line item, cash receipts.
- 04:17 Now remember this is a positive number, in the cash flow statement.
- 04:21 So we had to put the minus sign in front when I do the reference.
- 04:23 This is a cash flow statement, here it is, cash receipts.
- 04:26 This is why we do the direct cash flow interpretation.
- 04:30 Equals, minus, back to my calculations,
- 04:34 click on this, press Enter, copy it across.
- 04:37 Now for those who think everything is double entry,
- 04:41 at this point you're going to expect that the bar sheet will balance.
- 04:44 But it doesn't, we've still got this error, but
- 04:47 we know better, cuz we've done the control account.
- 04:49 So let's go back to this calculation now, and
- 04:53 we see we've still got to put the closing receivable from lines 38 in.
- 04:57 So into the balance sheet,
- 04:58 here's my accounts receivable in this line here which is simply equals.
- 05:03 No complicated summation that we have to do in other models.
- 05:07 Take that number here, press enter.
- 05:10 And hopefully when I copy it across the row to here,
- 05:13 our row check is going to be happy.
- 05:16 And it is, look at that, we've done our first calculation.
- 05:20 We've put through revenue, we've also done our receivables,
- 05:23 we can stop ticking things off.
- 05:25 We've got a model that is actually working, and
- 05:28 our error ckecks say that everything is happy, we can carry on, our balance sheet
- 05:34 It's balancing, will miracles never cease?
- 05:38 Okay, so revenue is done, what's next?
Lesson notes are only available for subscribers.