Business and Money
If you look at even the most basic accounting package, they will usually have a Nominal Ledger. Well thatīs great, sure, but what exactly is it?!
The Nominal Ledger may sound like a rather difficult to understand accounting thing, but the basics of the nominal ledger are really quite simple.
Businesses spend money, and they also (hopefully) make money. This core information will give you two figures over any period of time: the amount of money the business received, and the amount of money the business spent. There is no denying that this is important information, particularly for a small start-up business, since this tells you whether you are making any money or not.
Income and Expenditure
As a business grows it is likely to need more detailed information, and this is particularly important where the business sells more than one service or product. Rather then simply knowing whether the business is making a profit or not, it becomes important to identify which areas of a business are making money and which are not. Your basic income and expenditure figures may show that you broke even. However by being able to analyse your accounts figures in further details you may see that the selling of one service may in fact be creating a loss, whilst the other is making a profit. This is a very mundane example, but it does illustrate how from this you can make a business decision as to whether to drop the selling of the loss-making service, or whether you make adjustments to turn it into profit.
In order to gain more detailed information, rather than just track what income you receive, you need to allocate it to different pots. As an example, lets assume that you sell two products (again, to keep it simple) and these are red and blue widgets.
When you receive money for a red widget, you need to allocate that amount to the red widget pot. Similarly, when you receive money for a blue widget, you need to allocate it to the blue widget pot. In this way you can not only see how much money you have received in total, but also how much you have in each pot and therefore how much you have received as a result of red and blue widget sales.
Accountants donīt call these pots - instead they are called Nominal Accounts. Each nominal account is given a unique Nominal Code so that it can be uniquely identified. In other words, a Nominal Code is a unique name for each of our "pots". Any accounting transaction is assigned a Nominal Code, or, again, in other words is allocated to a pot. So, we donīt look into pots, but instead we look at a particular Nominal Account so we can see what transactions have occurred, within a specified time period, for the relevant Nominal Code.
Nominal Codes will be assigned against invoice, credit and payment transactions etc. so that each Nominal Account will include debit and credit transactions, i.e. amounts that go into the pot, and amounts that come out of the pot.
The Nominal Ledger is simply the name given to the list of the Nominal Codes (and therefore the Nominal Accounts) that are set up within your accounting structure. In other words, it shows all of the different pots into which transactions can be allocated.
Usually the Nominal Ledger will give you the current debit and credit totals for each nominal account as well as access to each of the individual Nominal Accounts so that you can view the individual transactions that make up those totals.
The Nominal Ledger is used as the basis of the Chart Of Accounts, but this is for another article! (See "What is a Chart Of Accounts?" for more details on this)