infosheet The Nominal Ledger      Return to menu
     
   Introduction    The ledger that contains the detailed history of all the transactions that have been processed over a defined period of time, is referred to as the nominal ledger. Some may refer to it as the General Ledger. The relationship the nominal ledger has with the other ledgers, the trial balance and the financial statements is shown in Figure 1 below.

The number of transactions recorded in the nominal ledger is bound to grow with time. This is particularly so, if one remembers that there will always be two or more separate entries made in the ledger for each, and every transaction.

To make sense of this mass of information, it is customary to arrange the posting of transactions into accounts or codes. Periodically, a list of the current balance of each separate account is drawn up. This summary report is called the trial balance.

The trial balance is normally written up to form two columns of figures. The left figure column will contain all the debit balances, and the right the credit ones. The totals of these two columns should always add up to exactly the same amount. If they don't, then one or more errors have been made in the double entry accounting.

The way the individual accounts are arranged in the trial balance follows a fairly conventional format, depending upon what type of business you are looking at. We will stick to the following kinds of trading entities:

  • Limited Company


  • Partnership

  • Sole-trader

    The format and content of all company's accounts is governed by the Companies Act 1985 (as amended by the Companies Act 1989).

    There is no equivalent regulation of the content of partnerships or sole-trader accounts. Since the introduction of Self Assessment, many businesses have now sensibly adopted a format that adheres to the disclosure requirements of the Inland Revenue's Self Assessment tax return forms. As every business with an annual turnover of £15,000 or more, has to eventually complete one of these returns in the required format, it makes sense to adopt it at an early stage.

    • The point of arranging the trial balance this way, is to facilitate the easy extraction of the Profit and Loss Account and Balance Sheet that go to make the main two primary statements of the financial statements.

    It is the financial statements that most people associate with the term 'accounts'. Financial statements are used by many people to present the trading results (P & L Account) achieved in the year, and the change in the financial position of their business between the start and end of the same period (the Balance Sheet).

    The relationship between the nominal ledger, the trial balance, and the financial statements is shown in Figure 1.

       Figure 1.

    The relationship of the nominal ledger with the other primary statements    		   
    The relationship between the nominal ledger and the other primary statements


       Paper audit trail    Accountants, book-keepers and tax inspectors all talk about the importance of the paper audit trail. The audit trail is all about providing sufficient cross-referencing details to allow someone to trace a particular transaction or figure through the various ledgers and accounting records.

    For example, it should be possible to take a supplier's invoice for a telephone bill stored in archives, and trace it through to where it was posted in the relevant 'telephone' expense account in the nominal ledger. From there, you should be able to trace the year-end total of the telephone account up through the trial balance, and into the profit and loss account of the financial statements.

    If the bill had not been paid by the year-end, then it would appear as part of the amount owed to the telephone company listed as a creditor in the creditors' sub-ledger reported at the year-end in the balance sheet. A good paper audit trail would allow the reviewer to trace the balance on the creditors account, back through the trial balance to the nominal ledger. The creditors' control account in the nominal ledger should contain a transaction entry for the original telephone bill.

       Example formats and coding structure    We provide three suggested nominal ledger structures, with probably every code you are ever likely to need as a small business. The code ranges given in Figure 1 reflect these basic formats.

  • Limited Company


  • Partnership

  • Sole-trader


    • It is important to appreciate that these listings are not prescriptive.

    If you are currently using a manual accounting system, then the income and expenditure sections will give you a good idea of the range of column headings you should use in your accounting analysis books.

    If you use accounting software such as Sage, TAS, or Quickbooks then you will know that the suppliers will normally suggest a code listing you would be well advised to adopt.

    The account coding structure we use in the example ledgers above, should be viewed as just a guide. They provide a flexible structure, with room for the inevitable addition of new account codes that every business is bound to need.

    If you are considering computerising your accounting system for the first time, please talk to us about the setting up the nominal ledger system before investing any time inputting your figures. Many software houses provide inadequate outline nominal ledger structures. If these are adopted without a little planning, you can find yourself in a right old mess six months down the line.