Nominal ledger

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What is the Nominal ledger all about?

The nominal ledger is a way of tracking, what the company is worth and how it has made it's money.

The nominal ledger splits into two sections:

  1.     The Balance Sheet; and
  2.     The Profit and Loss account.

The Balance sheet will normally cover the nominal codes between 0000 and 3999, The Profit and Loss Account covers the range from 4000 to 9999

The Balance Sheet

The Balance sheet keeps track of how much the company is worth this in turn is split into sections:

  • Fixed Assets - These are the property of the company, assets that the company uses to function.
  • Current Assets - These are the things that the company has that are transient and not required for the functioning of the business. These are generally speaking things such as money owed to the company, cash, positive bank balances (owed to the company by the bank), stocks and work in progress
  • Current Liabilities - These are transient debts, for example outstanding bills, unpaid VAT, PAYE/NIC or Tax.
  • Long Term Liabilities - These are debts that are of a long term nature such as financed purchases or loans
  • The final section is commonly called Financed By, it accounts for how the company came to have the value it has, normally this is made up of. Money paid for shares in the company (Capital), Profits from previous years (Reserves or Retained Profits)

In short, the Balance sheet gives you a picture of the companies value, when you make a sale, the money due is added to the debtors control account, increasing the value of the company, this is offset by the money owed to the VAT man being added to the VAT Sales Account, In addition there may be a decrease in stock value (if you sold some thing from stock). This is incomplete because we have not considered the P&L account transactions, but you should be able to see how transactions affect the Balance Sheet.

The P&L Account

The P&L account is the prime focus of most businesses, this is poor practice, you can generate profit by disposing of assets and selling stock and run the company into, the ground very quickly. The P&L account is only half of the overall picture.

Profit is simply the value of sales less the costs, to make it easier for management to find strengths and weaknesses these are normally broken down into three.

  •  Sales - These are normally the accounts between 4000 and 4999 they represent the different types of sales that the company has made
  • Direct Costs - These are costs that directly arise as the result of selling something, if you resell someone else's products then this would be the cost of purchasing the product. If you make something then it would be the cost of materials, labour and subcontractors. Direct costs are normally broken down into the same groups as sales so that they can be compared against their corresponding sales. This gives the gross profit a useful figure which indicates the core profitability of manufacturing or selling products. As a manager this is a key indicator and one that needs to be watched if it goes high you want to know why and keep it high, if it goes low you need to take action because this is core profitability.
  • Indirect Costs - These are costs that are related in part to the the sales but not directly, advertising, manufacturing labour and the like may go up and down to a certain extent depending on sales, but they are not completely removed if there are no sales.

 

  •   Overheads - These are costs that you have regardless of how much you sell, premises, salaries, office equipment and the like. Again these are normally broken down further popular arrangements such as:
  •  Premises - Rent, Rates, Cleaning;
  •  Administration & Selling - Staff Salaries, Cars, Stationery;
  •  Legal & Professional - Legal Costs, Bank Costs, Accounting Costs;
  • Depreciation - this represents the reduction in value of the things the company owns. They reduce in value because they wear out and will need to be replaced. Whilst there is no cash cost to the company of depreciation it is a real cost. There are lots of ways to depreciate assets, it is up to the directors of a company to decide how they should be depreciated, the goal is to estimate the life of the asset to the business and it's value at disposal to ensure that equipment can be replaced when needed. It may be the case that directors have a different view to that of accountants and the revenue, if this is the case then the auditors can re-adjust depreciation for tax purposes.

These are the common ways of breaking down overheads, they may not be appropriate for your business, if you want to break down into different sections then that is okay.

Summary

The Balance sheet represents the value of the company
The Profit and Loss account indicates the profit made

Both are broken down into sections, sub sections and individual accounts

Management looks at the sections for an overview and drills down into sub sections and individual accounts to find out why are good or bad so that they can try to avoid bad results and encourage good results. Seeing the relationships between marketing campaigns and sales can indicate the viability of the campaign, changes in strategy can be measured to indicate good and bad moves enabling better targeting of resources.

Because each business if different you may have accounts that are broken down differently, your goal is to ensure that comparable items (such as sales and costs of sales) are grouped in the same way in each set of accounts so that like for like comparisons can be made from the accounts.