I have a number of residential water meters (approx. 120 in one zone) that are fed from a single bulk meter. I?d like to have one ?summation account? that will have the consumption total of all the residential meters, which I can then compare to the total on the bulk meter.

What is the best way to do this? Must I create one ?Summation Account? (e.g. called Combined Totals) where I add all the residential meter accounts to it? When does one use a ?summation meter??

You can add a Summation Account as suggested, that should work fine. If you have performance problems, you could move to a Summation Meter.
Sometimes, if the performance goes down because there are too many meters in a meter account, you can still have that meter account, but create a summation meter to the right of it: Basically, you add the Summation Meter, and then specify the Meter Account that is performing badly.
What that will do, is the summation will occur in the db between the meters in the background, whenever meters are 'called in'. So you will be left with one meter, which you can then use in another similar meter account (with the same tariffs); but instead of adding all 120 meters to it, you just add the one. This will affect your real time performance a lot, making it much better.
However, there are some aspects you must be aware of. One of them is that the time until when the summation meter can call in, is the earliest time until which any of its component meters has called in. That means you must have a 100% call in rate of the component meters, otherwise your summation meter will be 'stuck'. And take care to 'uninstall' old meters (on the Meter Details screen); and not just disable them, when they get taken out, otherwise the summation meter will wait for them too.
Another reason why people use the Summation Meter, is when they have multiple levels of summation or partitioning going on on their meters. For instance, we have a customer who partitions the readings from meters amongst his tenants according to their area (square meters: you can set this up in the Edit->MeterAccount page). However, the amount that he wants to partition like this is not a real water meter, but is itself a summation consisting of the main incomer minus the meters that he does have for 3 tenants. So, the remaining tenants must pay for the rest of the water coming in to the site, and it gets apportioned according to their shop size. The Summation Account is in this case the first level of calculation, which is the main incomer minus the 3 internal water meters, and this meter then gets added to the remaining tenants and split up according to their area.

One more question:
Should I create the summation account by - creating a new 'Meter Account' and adding all the meters; or by creating a new 'Meter Account Group' and adding all the meter accounts?

You should do it by creating a new Meter Account, and adding all the meters. Not by creating a Meter Account Group.