Nominal accounts overview

Nominal accounts are fundamental to the successful management of your finances.

• Nominal accounts store all your accounting transactions from all your Sage 200 modules.

  The nominal accounts accumulate debit and credit balances according to the type of transactions you process.

• You must create default nominal accounts before you an post transactions in any of the Sage 200 modules.

When setting up your nominal accounts, you must decide:

• The report category.

  This is used to create your financial statements. You must divide your nominal accounts into groups known as report categories. These report categories are then used to create the Balance Sheet and the Profit and Loss. You must group your nominal accounts so they fall into the following broad categories:

  Assets

  All resources that are needed to carry out your business are known as assets. Asset accounts include the value of your assets at any particular point in time. Assets also include all the tangible things that are part of your business: the premises, machinery, office equipment, furniture, vehicles and tools. For example, if you buy a new cartridge for your computer printer, this is an expense because it is a consumable and not an asset.

  The term fixed assets is used to describe those assets that are not used up quickly or are not intended to be sold or disposed of in the short term. The removal of a fixed asset from the business would have a noticeable effect on the business or the working environment. Therefore, fixed assets include the premises itself, plant and machinery, vehicles, office equipment and the like.

  The term current assets is used to describe those assets that vary according to the everyday conduct of the business. These include the bank and cash, trade debtors and stock. If you are selling products from stock every day, then the balances of your stock, debtors, bank and cash asset accounts vary every day too.

  By their very nature, fixed assets tend to stay with the business for some time; usually more than a year, sometimes for decades. Over a period of time, the value of fixed assets changes. When you buy a new car, you know that next year, the car will be worth somewhat less than its original value. The same is true for most fixed assets though some, such as premises, will accrue value over time. The balances of fixed asset accounts must vary to reflect the change in value over time, but this does not happen with the same frequency as current asset account balances. Periodically, perhaps monthly, quarterly or annually, the value of fixed assets must be reassessed. Adjustments need to be made to the account balances to reflect the change in values. If an asset increases in value over time, your business has effectively made a profit that is equal to the difference between the original value and the new one. If the item decreases in value over time, then your business makes a loss equal to the difference. These profits and losses have to be recorded and affect the true profit that your business makes in a given period.

  Since there are few fixed assets that increase in value with the exception of premises owned (unless your business is full of antiques or rare paintings), most businesses are concerned with the losses that are incurred when fixed assets depreciate in value.

  Liabilities

  Liabilities include the value of all items that you owe to others. These can include outstanding purchase invoices, loan balances and mortgages. Any commitments that reduce the assets of the business in the foreseeable future are included in the liabilities category. For example, if your business is registered for VAT, there is a good chance that you will have accrued VAT over your VAT accounting period. Since the money will have to be paid in due course, it must be added to the liabilities total. Similar rules apply for income tax and national insurance, pensions, and other accrued expenses. Capital is also a liability. When owners invest money or other items of value in the business, the business owes that value to them. In some cases, it may never be repaid, but remains a liability as far as the business is concerned.

  Liabilities are further categorised according to the period over which they may become due. Long-term liabilities are those repaid over a long period of time. These include mortgages, debentures, loans and hire purchases. Short-term liabilities include those that vary during the course of everyday business such as the amount owed to suppliers (the creditors' total), PAYE, national insurance and pension funds.

  Income and expenditure

  For all commercial enterprises, whether a sole trader or a large conglomerate, continued business means earning income or revenue. The amount of income must exceed the running expenses, at least in the long term, if the business is to survive. Sufficient income needs to be raised to make a profit to enable further investment in the business if it is to grow. Most of the income comes from the goods or services sold by the business. Other income can be earned in the form of interest on savings, charges, rents and appreciation on assets.

  For most businesses, expenses are incurred in the process of earning income. There is a whole range of expense accounts that may be maintained, from paper clips to electricity bills. The types of expenses incurred clearly varies according to the type of business. The amount of detailed analysis required determines how many accounts are needed to accumulate the value of expenses. For example, it may be sufficient to include all petty expenses, such as magazines, tea and coffee, cleaning fluids in a sundry expenses account rather than holding one account for each heading. You may want separate accounts for electricity, gas and coal, or to accumulate them all under one heat and light expense heading.

  • Purchases are goods or services that are bought for the purpose of manufacture, resale or other aspects of trading. For example, a business that sells cameras, purchases stock from a supplier and resells the goods to their own customers for a profit. As the business improves, more cameras are sold and therefore more have to be purchased. There is a relationship between expenditure and sales. Similarly, if a company manufactures goods from raw materials, then the more business done, the more raw materials are purchased and used in the process.
  • Labour costs may be incurred, such as overtime. Again, there is a direct or indirect relationship between the expenditure and sales. All expenses that fall into this category are often grouped under the terms cost of sales accounts, trading expenses, direct and indirect expenses.
  • Overheads are costs that would be incurred regardless of whether sales were taking place. The rent on office premises, the electricity bill, the cost of administrative staff and insurances, all have to be met regularly and are not directly affected by sales. That is to say, they do not necessarily increase or decrease as income fluctuates from one week or month to another. Overheads include all kinds of sundry expenses, such as office cleaning, lighting, road tax for a van, work clothes, telephone and fax, paper and office consumables.

  If you incur an expense regularly with a particular supplier and you are offered credit, then you may want to include them in the Purchase Ledger, even though they may not be classified as purchases in the sense described previously. It is simply convenient to track outstanding invoices for expenses incurred on credit in this way. For petty cash expenses, repayment of mortgages and loans, insurance, rates and other nominal expenses, it is sufficient to enter transactions through the Nominal Payment and Receipt routine to update nominal accounts directly.

  Each business transaction affects the asset, liability, income and expenditure accounts in different ways, according to the type of transaction. For example, if you buy some stock on credit from a supplier, the value of the stock asset accounts increases as does the value of the liability. If the same stock was bought for cash (in other words, you wrote out a cheque for the goods on delivery), then, instead of the liabilities account being increased, the bank asset account would be decreased. The stock asset account would still be increased.

  The Balance Sheet calculated from your assets and your liabilities. The Profit and Loss is your income less your expenditure.

• Your cost centres and departments (if required).

  You can use cost centres and departments to divide your nominal accounts into segments and subdivisions depending on your company's structure. You can report on the costs and revenues associated with each cost centre and department separately.

  You must create your cost centres and departments before creating your nominal accounts.

• Your budget and budget type (if required).

• The account type.

  You use the account types to create levels in your chart of accounts. You can use Group accounts to link your nominal accounts together. This can be for budgetary control purposes, and for reporting on your financial statements.

Creating your nominal accounts is such an important task that it is worth while taking the time to plan the accounts you need.