Nominal Accounts Examples – Lesson Five

The General or Nominal Ledger is the book containing all the information from which our monthly and annual accounts are prepared. I am going to provide some nominal accounts examples to show how we should categorize the various nominal accounts and this will help in setting out the initial listings where computerized accounting packages are involved.

Nominal Accounts Examples

Balance Sheet Nominal Accounts

When starting a new business the owner will provide a sum of money to purchase the items his/her business will need to commence trading and to cover the running costs until the business generates an income. Any monies invested into a business are termed Capital.

The Business Capital

Capital may be invested into a business from the owner, partnerships or investors. Our first Nominal Account will be the “Capital A/c.” The intention of the business owner is to generate profits and to use some of the profits to grow the size of the business. The next account we will open will reflect the business growth and show the amount of profit that has been retained in the business to help fund its growth. Our nominal account will be named our “Retained Profits A/c.”. The owner may wish to withdraw some of his capital investment and these withdrawals will be shown in a “Drawings A/c.”.

If the business has loaned money and the loan period exceeds 12 months then the amount that will become due after 12 months is regarded as a long-term loan and will be included in our business capital as a “Long-Term Loan A/c.”

Fixed and Current Assets

In readiness to commence trading the business is going to invest in some assets. The first category of assets we will consider are known as Fixed Assets.

Fixed Assets

Assets which are intended to stay in the business for a long time and are NOT for resale are known as Fixed Assets. We will be opening nominal accounts for each category of fixed assets which are relevant to our business. The Fixed Asset accounts we may need to include might be a “Land and Buildings Cost A/c.” (owned by the business or obtained on a long lease), “Plant & Machinery Cost A/c.”, “Motor Vehicles Cost A/c.” and “Office F & F Cost A/c.” (F & F = Fixtures and Fittings).

If we have purchased a lease on our property then every year the remaining term of the lease will decrease and this will reduce the value of the lease. We need to recognize this within the business and will have a nominal account “Lease Amortization A/c.” Other fixed assets in the business will also reduce in value over time due to wear and tear. We recognize this by setting up depreciation charges against each asset, these will be our “Plant & Machinery Depn. A/c.”, “Motor Vehicles Depn. A/c.” and “Office F & F Depn. A/c.”

Current Assets

Current Assets are items owned by the business which change on a day to day basis as the business trades. We list current items according to their liquidity (the time it is likely to take to turn the asset into cash).

  • The least liquid of the current assets is the stock of materials, work in progress and finished goods held by the business and not yet sold. The nominal account we require is “Stock A/c.”
  • Next, we have the amount owed to us by our debtors (where we have sold some of our stock but are awaiting payment). The nominal account will be the “Trade Debtors A/c.”
  • At times, we may have amounts owed to us which are worryingly overdue and it is prudent to make a provision in case these turn into bad debts. We list a “Bad Debts Provision A/c.”
  • The next account to list covers the value of prepayments the business has made. An example of a prepayment would be where a business pays the road tax for a vehicle for the coming 12 months. We calculate the value of the number of months paid in advance and that is the prepaid amount. We require a nominal account called “Prepayments A/c.”
  • Our final two accounts cover the most liquid of our current assets, the amount we have in our bank account and the cash we hold within the business. These nominal accounts will be “Cash at Bank A/c.” and “Cash-In-Hand A/c.”

Current Liabilities

Liabilities of the business will include our creditors and we include a nominal account “Trade Creditors A/c.” We then have an account for amounts owed but have not yet charged to us, for example the gas and electricity used during the month. We calculate or estimate a sum due and enter it in the “Accruals A/c.” in the nominal ledger.

Short-term loans received (where repayment is due within 12 months) are included under Current Liabilities. A “Short-Term Loan A/c.” is included in our nominal listing and finally we may require an account for “Bank Overdraft A/c.”

Summary of Nominal Accounts Listed So Far

We have now listed the nominal accounts which will be included on our business’ Balance Sheet. These are the accounts we have to date:

CAPITAL ACCOUNT

Capital A/c.

Retained Profits A/c.

Drawings A/c.

Long-Term Loan A/c.

FIXED ASSETS

Land & Buildings Cost A/c.

Lease Amortization A/c.

Plant & Machinery Cost A/c.

Plant & Machinery Depn. A/c.

Motor Vehicles Cost A/c.

Motor Vehicles Depn. A/c.

Office F & F Cost A/c.

Office F & F Depn. A/c.

CURRENT ASSETS

Stock A/c.

Trade Debtors A/c.

Bad Debt Provision A/c.

Pre-Payments A/c.

Cash At Bank A/c.

Cash In Hand A/c.

CURRENT LIABILITIES

Trade Creditors A/c.

Accruals A/c.

Short-Term Loans A/c.

Bank Overdraft A/c.

Question:

A brief exercise for you. Note all the above accounts and write next to each one whether you would expect to see the balance on the account as a DEBIT or a CREDIT.

The answers will be given later in this lesson.

Income And Expenses Nominal Accounts

There can be many accounts in this section and different businesses will encounter different expenses. To assist you I have listed accounts for this section following the sequence included in the Revenue Self Assessment returns, with a few additions that are not tax deductible but are none-the-less expenses of the business.

List the accounts you will be encountering within your business within these categories:

SALES

MANUFACTURING COSTS

PURCHASES

STOCK MOVEMENT

OTHER INCOME

CAR EXPENSES, TRAVEL AND ENTERTAINMENT

ADVERTISING

SALARIES, STAFF COSTS

RENT, RATES, POWER AND INSURANCES

REPAIRS & RENEWALS TO PROPERTY AND EQUIPMENT

ACCOUNTANCY, LEGAL AND OTHER PROFESSIONAL FEES

INTEREST TO BANKS, CREDIT CARDS etc. AND FINANCE CHARGES

PHONE, FAX, STATIONERY AND OTHER OFFICE COSTS

BAD DEBTS WRITTEN OFF AND PROVISIONS FOR BAD DEBTS

OTHER SUNDRY EXPENSES

LEASE AMORTIZATION CHARGES, FIXED ASSET DEPRECIATION CHARGES

Several of the headings above could “house” many accounts. For example the Sales category; to facilitate control of the business it is usual to analyze the sales and have a separate sales account for each product or range of products that you sell.

Answers To Question On Balance Sheet Nominal Accounts

Did you use the four basic rules introduced in Lesson One?

CAPITAL A/C.

Monies invested into the business by the owner(s); monies received by the business will be a debit in the cash account and therefore CREDIT to Capital A/c.

Retained Profits increase the capital in the business, CREDIT to Retained Profits A/c.

Drawings occur when the business pays back some of the capital to the owner(s), a payment in the cash account is a credit and we DEBIT the Drawings A/c.

Long-Term Loans are monies received by the business so a debit in the cash account and CREDIT Long-Term Loan A/c.

FIXED ASSETS

All fixed asset costs are items purchased by the business, credit in cash account and DEBIT the Fixed Asset Cost Accounts.

Depreciation is a reduction in the value of the assets, we will CREDIT the Fixed Asset Depn. Accounts

CURRENT ASSETS

Stock has been purchased by the business, credit cash account and DEBIT the Stock A/c.

Our rule states Debit the Debtors and Credit the Creditors. DEBIT our Trade Debtors A/c.

The bad debt provision reduces our debtors value, CREDIT PrePayments A/c.

Cash At Bank and Cash In Hand are our cash account balances. To have cash at the bank and in hand we will have received monies and debited our cash accounts, DEBIT Cash At Bank A/c. and DEBIT Cash In Hand A/c.

CURRENT LIABILITIES

We CREDIT the Trade Creditors A/c.

Accruals are similar to creditors, we have received the service but not yet received a bill nor paid for the service received, CREDIT the ACCRUALS A/c.

Short-Term Loans are monies we have received being debited to our cash account and a CREDIT to Short-Term Loans A/c.

When our bank is overdrawn this is also our cash account balance. To have overdrawn we will have paid out monies being CREDIT on the Bank Overdraft A/c.

There were some accounts included above in the listing for our business Balance Sheet which we have not encountered before. These are the Depreciation Accounts, PrePayments, Accruals, Bad Debt Provisions, Lease Amortisation and Stock accounts. These topics will be covered in our next lesson. To progress to the next lesson please click here.

If you have any comments or questions on this subject, please leave them in the area below and I will be very pleased to help you out.

 

Colin

 

 

 

 

 

 

 

 

 

 

 

 

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