Revenue Part 2 - Control Accounts

Quick reference

• 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?

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