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What is a Nominal Ledger?

       Accounts and Bookkeeping


Date Published: March 2007

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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.

Nominal Accounts

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)


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Comments

Posted by Clair
On Monday 22nd of November 2010 01:56:48 AM

"thanks for breaking it down."

Posted by Joram
On Tuesday 22nd of February 2011 11:11:28 AM

"Please i will be grateful if u sent me some publications on chart of accounts and the meaning of vote on Account. thank you."

Posted by Faith
On Friday 5th of August 2011 10:01:50 AM

"Thank you for the info. Very easy to understand. "

Posted by Dan
On Saturday 3rd of December 2011 12:13:01 PM

"Thax, very useful indeed!"

Posted by jean
On Wednesday 4th of January 2012 11:50:36 PM

"super teaching style..thanks a lot"

Posted by Ahmad masood
On Friday 26th of October 2012 07:52:36 AM

"Thanx a lot . This topic was very difficult for me in past , but now all is clear and I´m happy that totally I got it ."

Posted by Josh
On Tuesday 4th of February 2014 03:40:08 PM

"Just wanted to write a quick thank you for this :)"

Posted by Karuma
On Wednesday 5th of March 2014 12:00:22 PM

"Thank you, very informative and helpful!"

Posted by Zoe S
On Tuesday 3rd of February 2015 09:33:09 PM

"It suddenly makes sense now I can picture the pots, thank you"

Posted by Elaine avery
On Friday 3rd of April 2015 01:18:37 PM

"Thanks this has broke it down into layman´s terms"

Posted by Socheata
On Tuesday 8th of December 2015 02:44:02 PM

"Thanks for your explaination. It was really helpful. But I still have something in my mind. So nominal ledger is not mean that we only can use the number of invoice to stated it but also the code that we already agreed in the firm and stated for us to be more understandable? "

Posted by Natali
On Wednesday 20th of July 2016 08:37:54 AM

"Awesome break-down! Thank you so much! I finally understand the concept!"

Posted by C Brad
On Wednesday 26th of October 2016 12:24:52 PM

"That was very well explained. Good work. (i hope) :) "

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