Nominal ledger is the heart of any accounting system and its structure of accounts is the most important concept. A perfect structure of accounts could be a golden way to have a elegance accounting data entry.

This page you will find that there are five different types of accounts within the nominal ledger, although entries may freely be posted between them. The topics covered are:

The five different types of ledger

The five different types of account are explained in this section. They are all in the main nominal ledger and, despite their different features, entries may be posted freely between them. To repeat key points made in the last chapter, this must be done with debit receiving the benefit and credit giving the benefit, and with the total of the debits equaling the total of the credits. Any standard accounting application will use these accounts as heart of accounts then these accounts are very important and these are basic in chart of accounts.

Types of ledger books

The five different accounts are treated differently when the accounts are prepared. They are:

  1. ASSETS
  2. LIABILITIES
  3. CAPITALS
  4. INCOMES
  5. EXPENSES
ASSETS

These accounts normally have a debit balance and are made up of assets that retain their value.
This is distinct from say the electricity account which is an expenditure account. 

Examples of asset accounts are stock, motor vehicles and bank accounts (if there is not an overdraft). Money owing to the business is in debtor accounts and these are asset accounts. Asset accounts eventually go into the balance sheet, not the profit and loss account.

In the last chapter the £2,700 for widgets went into stock, which is an asset account. The other side of the posting went to a liability account

LIABILITIES

These accounts are the debts of the business and they normally have a credit balance.

Examples  are the accounts for money owing to suppliers and these accounts are called creditors.
A further example is the bank account (if there is an overdraft). Liability accounts eventually go into the balance sheet, not the profit and loss account.

In the last chapter the £2,000 invoice from King Brothers was credited to a liability account. The other side of the posting went to an expenditure account

CAPITAL ( EQUITY )

These accounts represent the investment in the business by the owners. If the business is a company,
it is the net worth owned by the shareholders. It might be hard to grasp but it is true for all businesses, even a sole trader. If the capital accounts in Deborah 
Fountain’s hat making business total £7,000, then this is her investment in the business. She could take the £7,000 out, close the business down and go on holiday. The business is
separate from the person who owns it. An example of a capital account is Revenue Reserves.

INCOMES These relate to sales or other income and they increase the profit. They almost always have a
credit balance
and are eventually credited to the profit and loss account. Of course, if goods are returned for a refund, there will be a debit to an income account.
In the last chapter the sale of £4,000 to J. K. Patel Ltd was credited to an income account. The other side of the posting went to an asset account.

EXPENSES

These accounts are made up of expenditure that reduces the profit. They almost always have a debit balance and are eventually debited to the profit and loss account.

In the last chapter the £2,000 invoice from King Brothers went into an expenditure account.
The other side of the posting went to a liability account

If the business makes profits after tax, and disregarding dividends and other distributions, the value of the capital accounts will increase over time. So long as a business is solvent the capital accounts will have credit balances. A net debit balance is a desperate sign of trouble and often means that the closing of the business is imminent.

All this is illustrated by the following ten commonly used accounts. Marked by the side of each is whether they usually have a debit or credit balance and the type of account that they are.

 

Capital accounts

Books of Accounts

Books of accounts are primary place to record financial transactions and after it, records will be analyzed and with a standard format will send to ledgers. Basically, there are 4 types of books of accounts:

  • Cash books
    •  All cash transactions and deals with cash, whatever cash out or cash in, will be recorded in it
  • Purchase Book
    • All Purchasing of items and goods from suppliers, will be recorded in it
  • Sales Book
    • All Sales of items as goods or services to customers, will be recorded in it
  • Journal Book
    • All transactions of the same nature together and special double entry (journal entry will be recorded in it. usually professional accountants will use this book)