This main ledger, which is often known as the nominal ledger, is explained in more detail, and the various posting
mediums are explained.
- Nominal ledger
- Books of prime entry
- Nominal journal (or just journal)
- Sales ledger
- Sales day book
- Purchase ledger
- Purchase day book
The Nominal ledger
The nominal ledger is the principal ledger. Other ledgers may be kept, particularly a sales ledger
and a purchase ledger, and in a size-able business this is very likely, but each one will be a subsidiary ledger and reconcile to a control account in the nominal ledger. This means that, for example, the net total of thousands of accounts in the sales ledger adds to just one figure which is a single account in the nominal ledger. According to circumstances other subsidiary ledgers may be kept. An example is a listing of the various fixed asset accounts.
The nominal ledger may be very big, perhaps containing thousands of individual accounts. This will certainly be the case for a major company and it is therefore necessary to have a system for coding and grouping the accounts.
In a simple system the accounts will just be listed, probably in alphabetical order. In a more complex system they will be grouped in a logical manner. For example, if there are several different bank accounts they may be listed next to each other. This is convenient and when the balance sheet is prepared all the bank accounts will be added to the
one total that will appear in it. Similarly, it is usual to group all the overhead expenditure accounts by department.
In all but the very smallest systems, it is normal to give each account an identifying number.
This is quicker to write out and if the system is mechanized or computerized, the person posting the entries will post according to the numbers only.
There are thousands of different accounting numbering systems and you may want to design your own to fit your business and individual circumstances. It is worth looking at the numbering system of your employer or some other organization. Whether or not it is a good system, make sure that you understand the principles of the numbering.
The books of prime entry
It is possible to write all entries directly into the nominal ledger without using subsidiary books at all. This is sometimes done, especially in very small businesses, but there are two major drawbacks:
- Unless the business is exceedingly small the main nominal ledger will become clogged up with a very large number of entries.
- It is a good idea to record a certain amount of detail about each entry, and not just the amount and the name of the account that completes the double entry. There just is not room in the nominal ledger for the necessary details.
It is good practice to post to the nominal ledger only from the books of prime entry. The necessary details should be recorded in these books and it is usually just totals that are posted to the nominal ledger. There are a number of books that may be encountered but the following three are used in most businesses and are examined in this chapter:
- The nominal journal (or just journal).
- The sales day book.
- The purchase day book.
The term ‘day book’ is used because it may, in theory at least, be totaled and posted daily. The cash book is another book of prime entry and this is examined in the next chapter.
The nominal journal (or just journal)
Although there may be other books of prime entry, it is likely that the great majority of postings to the nominal ledger will be made by means of three of them, namely the sales day book, the purchase day book and the cash book. This will inevitably leave a number of necessary postings, probably important but relatively small in number, that do
not fit into any of these posting mediums. As Already explained, it is not a good idea to post directly into the nominal ledger without a posting medium. Apart from anything else some narrative details are highly desirable, to
reduce the risk of fraud, to assist auditors and to provide a trail of information for the bookkeeper and the managers. This leaves the nominal journal.
The journal is ruled to show the date, a reference number for the entry, the identity of the accounts to be debited and credited, the amounts to be debited and credited and a narrative explanation. An example of a journal entry is as follows:
This implies that the customer’s account (Curzon & Co) is actually in the nominal ledger but, of course, it is much more likely to be in a separate sales ledger. If this is the case, the journal entry would be to credit the sales ledger control account and a separate posting must be made in the sales ledger. A computerized system will make the second posting automatically.
You will no doubt have noticed that the journal is not laid out like a ledger sheet. This is because it is not a ledger sheet. It is a book of prime entry. It is possible that you may encounter a journal with a slightly different layout. There is more than one view about what is exactly best.
This section of the chapter is completed by showing how three events are written in the journal.
The three events are:
- It is noticed that an invoice for £76 from J. L. lafferty Ltd has wrongly been debited to Printing
and Stationery Account instead of Motor Expenses Account. The invoice was entered on 4 January as part of Purchase Day Book Batch 66.
- Interest of £9 (at an annual rate of 5%) for the year to 28 February is charged to the Director’s Loan Account.
- Annual depreciation of 25% is posted relating to Ford Mondeo XRJ 617. This relates to the year to 28 February and the car was purchased two years ago for £16,000.
It is important that each journal entry has a reference number so that it can be readily identified.
There are numerous reference number possibilities but JV (standing for Journal Voucher) or just J is often used. It is very likely that each nominal account mentioned Will have an identifying reference number. This was explained earlier in this chapter in the section on the nominal ledger. In real life the narrative would mention the year as well as the day and month.
The entry relating to depreciation may need a little explanation, though the subject is covered in detail in Chapter 6. The debit to Depreciation Account will increase the amount debited to the profit and loss account.
The credit to Depreciation on Motor Vehicles Account builds up a credit balance to offset the £16,000 debit balance in the balance sheet. After four years the motor vehicle will have a nil value in the balance sheet, represented by £16,000 debit and £16,000 credit.