What is a Nominal Ledger?
In accounting, a nominal ledger contains a detailed list of every transaction that occurred within an account. Many refer to the ledger as being T-shaped because of its T-shaped line dividing the two columns. It is a tool used in accounting as a means of recording and organizing transactions. It is most often used in businesses, but can also be used in detailed personal accounting. A nominal ledger can sometimes be called a general ledger. Many types of accounting records derive their information from the nominal ledger, including balance sheets, trial balance, and financial statements.
Generally, a different nominal ledger is used for each account. It can be used to keep a record of all transactions that occur for a certain checking or savings account. This type of ledger can also be used to record all transactions related to a certain aspect of business or department, like sales, marketing, or human resources. Businesses can use this information to identify which parts of their company are financially successful.
A nominal ledger is divided into debits and credits, with two columns, one placing debits on the left and the other with credits on the right. Also known as debts, debits occur when money is removed from an account. Credits occur when money is added to an account. Types of debits include payroll expenditures, operating expenses, and cash withdrawals. Credits include income from sales, investment income, or refunds from vendors.
When companies create their balance sheets, they use the information on the nominal ledger. This detailed ledger can also help an accountant ensure that the balances on the balance sheets are correct. A balance sheet is a summary of the balances of the accounts held by a business. Balance sheets are usually done at the end of each month.
A trial balance is a list of all of the company's account balances, and is also compiled using information from the company's nominal ledgers. A trial balance differs from a balance sheet because it is a running tally, and can be accessed from an accounting software program at any time. Essentially, a balance sheet is a declaration of a company's account balances as of a certain and specified date and time.
When detailed records are kept with a nominal ledger, a company can help reduce losses caused by human error or theft. When a nominal ledger is examined, it can also help reveal improprieties in the way money was spent or discrepancies in other financial records. A detailed ledger can also help keep a company up to date on its financial situation, reducing costly cash shortage surprises.