Nominal Codes & Chart of Accounts
Nominal Codes: What are they all about?
When setting up a file on a computerised accounts system the first thing you need to do is decide upon and setup your chart of accounts (or Nominal Codes). The “Chart of Accounts” is the backbone to any Computerised Accounts System. They should be set up in a logical manner which groups together your financial activities.
The standard groups are as follows:
Balance Sheet items: Fixed Assets, Current Assets & Current Liabilities
Profit & Loss items: Sales, Cost of Sales & Expenses
Usually each account is given a number (or nominal code), and it’s normally this number that helps to arrange the structure of the chart of accounts. Even though in some systems sales codes will start with 0 or 1, and in others, they may be a 4 or 5, the rules don’t change, but the numbers might!
Balance Sheet Items
Assets (Fixed Assets & Current Assets)
Fixed Assets: These include any long term investments (greater than 1 year), i.e. vehicles, land, buildings, equipment. For each fixed asset nominal code (other than land) you should have a corresponding depreciation code, e.g. Office Equipment Original Cost, Office Equipment Accumulated Depreciation. To find the current book value of your office equipment you deduct the Depreciation value from the Original Cost. If you purchase a company vehicle, the purchase value would be shown in “Vehicles – Original Cost”, and each year, depreciation can be applied to reduce the value of the vehicle.
Current Assets: These are assets which are expected to change in value within the next 12 months, i.e. Bank Account, Debtors (those who owe you money), stock, and any prepayments / deposits paid out (i.e. that money belongs to you).
Liabilities (Current Liabilities & Long Term Liabilities)
Current Liabilities: These are short term debts (less than 12 months), and often include Credit Card Accounts, Creditors (Suppliers you owe money to), VAT due, Employer Contributions due & Accruals
Long Term Liabilities: Debts that will still be there after this financial year, e.g. long term loans (for land / premises / buildings / vehicles), leases.
This section refers to how the business is financed, including Owner/Shareholder Capital, Retained Earnings (previous years profits), and any profit/loss for the current year.
When you deduct the Liabilities from the Assets, the resulting balance should match the total Capital figure, hence the name “Balance Sheet” as everything should balance
Trading, Profit & Loss
Sales / Income / Trading
These nominal codes should resemble your product categories, for instance a garage that also sells fuel may show a split between income from products and from services, e.g. Fuel, Tyres, Parts (Products), Labour (On Premises), Call-outs (Services) Some computerised accounts systems will allow you to track stock which can be useful for certain types of businesses. Sales of Fixed Assets e.g. company vehicles etc should not be included in this section.
Cost of Sales
This is the direct cost of creating your sales, i.e. if you had not made these sales, then you wouldn’t have had these costs. Examples include direct labour and product purchases or raw materials
These include every day running expenses like bank charges, office supplies, advertising, administrator wages, telephone charges, insurance etc. You might decide to group costs together, e.g. rent, rates, light & heat might group under “Occupancy Costs”. Bad debts and depreciation would also be included under expenses each year.
The only way you will know whether or not you have made a profit or loss is by comparing your sales to your Cost of sales and expenses. Some have tried to say that they have surely made a profit because they have more money in their bank account now than they had at the start of the year but the fact is: Sales – (Cost of Sales + Expenses) = Profit or Loss. Businesses should be keeping an eye on this monthly to make sure they’re going to hit their yearly targets.
A Trial Balance will show a snapshot of both Balance Sheet & Profit & Loss nominal codes: