Accounts, Nominal & Control Accounts Explained

 

What Are Nominal Accounts?

Nominal accounts are just headings, under which you analyse your income and expenditure, for example “Fees”, “Commissions”, “Electricity”, “Stationery”, “Furniture”, “Salaries”, “Telephones”, etc. Income nominals are typically referred to as “Sales” nominals, while expenditure ones are called “Purchase” nominals. You could instead choose to set up just a single nominal account for all expenditure called “All office overheads”, but obviously you will get a more informed view of your costs via the detailed breakdown.

 

What Are Control Accounts?

Control accounts are a type of nominal account, but whereas nominal accounts are used for business in a given period (e.g. commissions earned in 2003), control accounts are used for the on-going aspects (e.g. amount currently owed to the business). If there is £5,000 in your “Debtors Control” (i.e. the amount currently owed to you) in the last minute of your financial year, then it will still be there in the first minute of the next financial year, and indeed will stay until it has been received. In contrast, if you have entered £5,000 in the “Fees” nominal during the last month of one year there won’t be anything in the first month of the next year until you have done some more work.

 

Types of Nominal Account

There are four types of nominal accounts…

 

Profit & Loss Accounts (periodic)

1. Sales

everything you derive income from

2. Purchases

everything you have to buy to run your business

 

Balance Sheet Accounts (on-going)

3. Banks

all of your bank accounts (including client, deposit and savings)

4. Controls

on-going totals maintained by the system (e.g. Debtors, Creditors, etc)

 

Budgets

You must have some expected value in mind for each nominal account, for example, how much you’ll have to pay in rent per month. Such expected values can optionally be entered as the monthly “budget” figure for each nominal account. This is not essential. It is an optional feature that enables you to check retrospectively how close your actual trading figures compare to the “budget” figures of your original business plan.

 

No Accounts for Refunds

Do not create any special nominal accounts for refunds or commission clawbacks. Normal commission entries in the accounts are entered as “invoices”, for example, a sales invoice for commission you have earned, or a purchase invoice for goods you have bought. Occasionally you’ll have to enter a refund, for example, when you have to refund some of your commission. In this case you use the same sales nominal as the original invoice but select “Credit” from the “Type” dropdown at the centre top of the Invoice screen, which will make the entered values negative, as shown below.

 

 

Profit & Loss Accounts

Your trading profit or loss is the sum of all your sales minus all your purchases in a period (e.g. sales in 2001 minus purchases in 2001 equal profit-or-loss in 2001). Hence a Profit & Loss Report, also called a “Profit or Loss Report”, always contains all of your sales and purchase nominal accounts. Because of this, some accounting systems refer to the “Sales Nominals” and the “Purchase Nominals” jointly as the “Profit & Loss Nominals”. All of these accounts provide totals for given periods of time, for example…

Total fee earnings in June 2001

Total expenditure on telephones in the year 2001, etc

 

Balance Sheet Accounts

Your balance sheet accounts show what you are actually worth at a given point in time. In very simple terms this is…

the net value of all your bank accounts and other assets (i.e. Bank A/C No.1, etc)

plus what-you-are-owed (i.e. Debtors Control, etc)

minus what-you-must-pay (i.e. Creditors Control, etc)

 

The system divides these “Balance Sheet Accounts” into “Bank Accounts” and “Control Accounts”. In actual practice, you are likely to have a number of bank accounts (e.g. Barclays A/C 243365, Lloyds A/C 1231234, etc) and a whole range of control accounts, for example, “Tangible Assets”, “Share Capital”, Directors Loans”, etc. All of these accounts have a value at a given point in time, for example…

End-of-day balance of Lloyds Bank A/C No.25626 on 5th June 2000

Sum of directors loan still outstanding as at 20th September 2000, etc

 

Difference Between “Balance Sheet” and “Profit & Loss” Accounts

In the first millisecond of any new year you won’t have made any sales or purchases, so all your profit and loss accounts will be zero. However all your bank accounts will have exactly the same opening balances as they had at the close of the previous day. Similarly you will still owe, and be owed, as much as you were the previous day. Hence…

Bank and control accounts start each new period (typically a new year) with the previous period’s closing balance

Sales and purchase accounts start each new period (typically a new year) at zero

 

Moreover the control accounts show you where you stand, rather than what you’ve done. For example, if you have no assets other than £10 million in the bank, and then you purchase and immediately re-sell a house for £1 million…

Your bank balance would return to £10 million – so no change in your overall “worth”

Your purchase nominal will show £1 million spent on “House Purchases”

Your sales nominal will show £1 million received for “House Sales”

This would result in a trading or “Profit or Loss” figure of zero for the period, though the “Balance Sheet” figure would still be an impressive £10 million.

 

VAT

If your business is not VATable, to avoid the system calculating VAT unnecessarily, you should set all your nominal accounts to the “0” VAT rate. In this case it will not matter whether you enter “Yes” or “No” against the prompt “Include in VAT return”.

 

If you business is VATable you should enter the correct VAT rate for each nominal account. Typically this is rate 1, or 17.5%. Exceptions are for things like wages, pensions, rent, rates, insurance, charity donations and bank charges, which are all Exempt. You should also set the VAT rate to zero for railway travel, as you cannot claim VAT on railway tickets. All accounts should be included in the VAT return except those for bank charges, rent and wages.

 

Nominal Account Names

Durell recommends you use the same nominal accounts as those in your last year’s manually audited set of accounts. In addition to its text name (e.g. “Telephones”) each nominal account must have a short alphanumeric name or code (e.g. “TELE”, “TL01”, etc), which the system uses for sequencing them. So for example, you could set the short names of all your office overhead nominal accounts to…

 

OSTA  OFUR  OSAL  OTEL, etc

Or

5010    5020    5030    5040, etc

Or

5_ST    5_FU   5_SA   5_TE, etc

 

The above three examples all use acceptable four character alphanumeric codes. The first set would be sequenced OFUR, OSAL, OSTA, OTEL while the second would be 5010, 5020, 5030, 5040. The use of the same first letter or first number causes accounts to be grouped together (e.g. the above set of office overhead accounts might be followed by a range of transport ones, such as Travel by air, Travel by car, Travel by train, e.g. TAIR, TCAR, TTRA). Durell recommends that you use characters rather than numbers, as these are easier to remember. Durell also recommends that your long names should be structured, as for example…

Overheads, rent

Overheads, stationery

Overheads, telephones

Travel, car

Travel, train

 

See also “Accounts, Set-up Account Sets” and “Accounts, Standard Sets of Nominal & Control Accounts”.