Money and Business
A Nominal Ledger can frequently be found in even the most basic accounting software. Sure, that's fantastic, but what precisely is it?!
The Nominal Ledger may appear to be a complicated accounting concept, however the fundamentals of the nominal ledger are actually fairly simple.
Businesses spend money and (ideally) make money as well. This basic data will provide you with two statistics throughout any time period: the amount of money the company got and the amount of money it spent. There's no doubting that this is crucial information, especially for a small start-up business, because it indicates whether or not you're making any money.
Expenditure and Income
As a company grows, it will likely require more precise information, which is especially critical if the company sells many services or products. Rather than just determining if the firm is profitable or not, it is necessary to determine which sections of the business are profitable and which are not. You may have broken even based on your basic income and expenditure data. However, if you can examine your accounting statistics in greater detail, you may discover that selling one service results in a loss while selling another generates a profit. This is a very simple example, but it demonstrates how you can use it to make a business choice about whether to stop selling the loss-making service or make changes to make it profitable.
Rather than simply tracking your revenue, you need to divide it into multiple pots to obtain more specific information. Let's pretend you sell two products (to keep things simple): red and blue widgets.
When you get paid for a red widget, you must put that money into the red widget pool. Similarly, any money received for a blue widget must be allocated to the blue widget pool. In this manner, you can see not just how much money you've received overall, but also how much money you've received in each pot, and thus how much money you've received from red and blue widget sales.
Accounts Nominal
These aren't termed pots by accountants; instead, they're referred to as Nominal Accounts. Each nominal account is assigned a Nominal Code that allows it to be identified. A Nominal Code, in other words, is a unique name for each of our “pots.” Any accounting transaction is given a Nominal Code, or, to put it another way, it is assigned to a pot. So, instead of looking into pots, we look at a specific Nominal Account to see what transactions have occurred for the relevant Nominal Code over a given time period.
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, by assigning Nominal Codes to invoice, credit, and payment transactions, for example.
The Nominal Ledger is the name given to the list of Nominal Codes (and thus Nominal Accounts) that are created within your accounting system. To put it another way, it displays all of the numerous pots into which transactions can be divided.
The Nominal Ledger will usually show you the current debit and credit totals for each nominal account, as well as access to each of the individual Nominal Accounts so you may look at the individual transactions that make up those totals.
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