Nominal Ledger

Nominal Ledgers are ledgers that contain the summary of the transactions of an entity. These ledgers are otherwise known as general ledgers. They are used to record transactions and prepare statements of profit and loss to understand the entity's financial position.

The ledger is a record of financial transactions and contains records of an entity's expenses, purchases, and assets. The recorded transactions ensure the reliability of the entity's statement of accounts. They also contain information needed to prepare financial reports, such as the balance sheet. They reveal a company's financial health to shareholders, creditors, investors, and other interested parties.

• Nominal ledgers are ledgers that contain the summary of the transactions of an entity. Nominal ledger and general ledger can be used interchangeably. They are used to record transactions and prepare statements of profit and loss to understand the entity's financial position.
• The ledgers can record journal entries, prepayments, and accruals.
• These records will serve as a source for checking the waste of materials and resources.
• These reports aid the shareholders and other interested parties in making investments and necessary adjustments to the entity's operation. In other words, they help in management and decision-making.

A nominal ledger is a ledger where the transactions of an entity are recorded. It includes recording details of payments and assets of the business. Every transaction entered into the general ledger (nominal ledger and general ledger can be used interchangeably) has a corresponding debit and credit entry, ensuring that the sum of all the debit balances and the sum of the credit balances in the nominal ledger always equals one another.

The general ledger is considered out of balance if they do not balance or match, and this needs to be fixed before financial statements can be derived from it. It provides information for preparing financial reports such as balance sheets apart from the profit and loss accounts. The ledger also includes a chart of accounts and helps with cost estimation, assimilation, and control.

The ledgers can record journal entries, prepayments, and accruals. When these details are carefully recorded according to the company policies and generally accepted accounting principles and standards, the company has a system to work with. Compliance can be assured through the system, and deviations from the norms can be checked. One benefit of having such a system is that it ensures focus on the mission and vision of the company.

These records will serve as a source for checking the waste of materials and resources. They also help keep the expenses in check. The ledger also helps reveal the entity's accurate and fair view through the records prepared. These reports aid the shareholders and other interested parties in making investments and necessary adjustments to the entity's operation. In other words, they help in management and decision-making. 

Let us understand the concept with the help of some examples.

Example #1

Let us take the example of Dave, an accountant. He was in the process of preparing financial statements and wanted to check the accuracy of the trial balance. So naturally, the option was to check the ledger's accuracy. He verified it using the bills and vouchers for the specific period. Since all the amounts were tallied, he could certify that the trial balance was valid.

Example #2

Let's say, for example, a company in the U.S. sold goods worth $5000 in cash as of December 31, 2023. In the general ledger, the account has to record cash under the debit column and sales under the credit column.

It will be recorded as given below:

Using a nominal ledger has many advantages. However, it has a few disadvantages as well. Let us explore the list of its pros and cons below:

Advantages: 

• Maintaining ledgers can help in recording transaction details for the entity. This helps complete the trial balance and forms the basis for constructing the financial statements.
• It helps in the process of auditing and compliance. The factual accuracy of the financial statements and reports can be traced back and validated using this.
• When accuracy can be checked, it can help identify miscalculations and fraud. This is because every detail, including the date, involved parties, and transaction amount, is recorded.
• The ledger contains data for all essential transactions and helps check expenses and income. This helps in checking the costs and keeping them under control.
• These transactions can be looked into for decision-making and cost control purposes. Since they become the base of financial statements, they also help manage and make decisions.
• The decision to cut costs, replace machinery, or adopt efficient practices can be made by analyzing such transactions. Through proper maintenance of records, they can help in securing credit or loans. Looking at the nature and rate of expenses can help make investment decisions. 

Disadvantages:

• Manual entries can be subjected to errors. These errors, when undetected, can result in wrong balances being recorded. This can unnecessarily alter the entity's results (profit or loss).
• The recording of transactions and their every detail regularly can be tiresome. They can feel mundane.

Nominal and purchase ledgers present distinct functionalities in accounting. While both serve crucial roles, they differ in their scope and focus within financial record-keeping.

This article has been a guide to what is a Nominal Ledger. Here, we explain its examples, comparisons with purchase ledger, advantages, and disadvantages. You may also find some useful articles here –

• Sales Ledger
• Stores Ledger
• Subledger