Making I.T. Happen
Do not act on this information alone. always check with a qualified professional before making any change to accounting practice.
What is the Nominal ledger all about?
The nominal ledger is a way of tracking, what the company is worth and how it has made it's money.
The nominal ledger splits into two sections, the Balance Sheet and the Profit and Loss account. The Balance sheet will normally cover the nominal codes between 0000 and 3999, The Profit and Loss Account covers the range from 4000 to 9999
The Balance sheet keeps track of how much the company is worth this in turn is split into sections.
Fixed Assets - These are the property of the company, assets that the company uses to function.
Current Assets - These are the things that the company has that are transient and not required for the functioning of the business. These are generally speaking things such as money owed to the company, cash, positive bank balances (owed to the company by the bank), stocks and work in progress
Current Liabilities - These are transient debts, for example outstanding bills, unpaid VAT, PAYE/NIC or Tax.
Long Term Liabilities - These are debts that are of a long term nature such as financed purchases or loans
The final section is commonly called Financed By, it accounts for how the company came to have the value it has, normally this is made up of. Money paid for shares in the company (Capital), Profits from previous years (Reserves or Retained Profits)
So the Balance sheet gives you a picture of the companies value, when you make a sale, the money due is added to the debtors control account, increasing the value of the company, this is offset by the money owed to the VAT man being added to the VAT Sales Account, In addition there may be a decrease in stock value (if you sold some thing from stock). This is incomplete because we have not considered the P&L account transactions, but you should be able to see how transactions affect the Balance Sheet.
The P&L Account
The P&L account is the prime focus of most businesses, this is poor practice, you can generate profit by disposing of assets and selling stock and run the company into, the ground very quickly. The P&L account is only half of the overall picture,
Profit is simply the value of sales less the costs, to make it easier for management to find strengths and weaknesses these are normally broken down into three.
Sales- These are normally the accounts between 4000 and 4999 they represent the different types of sales that the company has made
Direct Costs - These are costs that directly arise as the result of selling something, if you resell someone else's products then this would be the cost of purchasing the product. If you make something then it would be the cost of materials, labour and subcontractors. Direct costs are normally broken down into the same groups as sales so that they can be compared against their corresponding sales. This gives the gross profit a useful figure which indicates the core profitability of manufacturing or selling products. As a manager this is a key indicator and one that needs to be watched if it goes high you want to know why and keep it high, if it goes low you need to take action because this is core profitability.
Indirect Costs - These are costs that are related in part to the the sales but not directly, advertising, manufacturing labour and the like may go up and down to a certain extent depending on sales, but they are not completely removed if there are no sales.
Overheads- These are costs that you have regardless of how much you sell, premises, salaries, office equipment and the like. Again these are normally broken down further popular arrangements are:
Premises- Rent, Rates, Cleaning
Administration & Selling, Staff Salaries, Cars, Stationery
Legal & Professional, Legal Costs, Bank Costs, Accounting Costs
Depreciation, this represents the reduction in value of the things the company owns. They reduce in value because they wear out and will need to be replaced. Whilst there is no cash cost to the company of depreciation it is a real cost. There are lots of ways to depreciate assets, it is up to the directors of a company to decide how they should be depreciated, the goal is to estimate the life of the asset to the business and it's value at disposal to ensure that equipment can be replaced when needed. It may be the case that directors have a different view to that of accountants and the revenue, if this is the case then the auditors can re-adjust depreciation for tax purposes.
These are the common ways of breaking down overheads, they may not be appropriate for your business, if you want to break down into different sections then that is okay.
The Balance sheet represents the value of the company
Both are broken down into sections, sub sections and individual accounts
Management looks at the sections for an overview and drills down into sub sections and individual accounts to find out why are good or bad so that they can try to avoid bad results and encourage good results. Seeing the relationships between marketing campaigns and sales can indicate the viability of the campaign, changes in strategy can be measured to indicate good and bad moves enabling better targeting of resources.
Because each business if different you may have accounts that are broken down differently, your goal is to ensure that comparable items (such as sales and costs of sales) are grouped in the same way in each set of accounts so that like for like comparisons can be made from the accounts.
What is open item accounting about
Open item accounting is simple, no accounting period is closed off during the year, the accounting period is defined by the date of the transaction. It is much more simple to use than traditional methods but it does have a weakness. Fortunately it's weakness is easily controlled and in most cases is never a problem. This means there are no periods to close down, there is no monthly close down, the periods are all always open.
Put simply if you back date a transaction into a period for which you have already presented management accounts then those accounts will be invalid as they will be missing your back dated transaction.
There are two options either reprint your original accounts and resubmit them with an explanation of the reason for the change or, move the transaction into the current accounting period so it will be reported on later. You need to use your judgement as to whether or not the original accounts are now misrepresentative to decide on which course to follow.
There are two ways to move a transaction from a previous period into the current period, the easiest is to simply change the date of the transaction using posting error corrections, however, this may also alter the date in the Sales/Purchase ledger and so delay payment and or confuse the supplier/customer. The alternative is to reverse the transaction on the original date and then repost the transaction with a current period date and match off the reversal and current date transactions in the supplier/customer ledger.
But to fix these errors you need to find them, fortunately there is a simple method to find back dated transactions after the point at which you produced your management accounts. To do this you need to know the point at which you printed the management accounts. Every transaction is Sage is given a unique number, you can see the numbers at the left hand side of account activities and in the audit trail. The current transaction number is also shown in the bottom right of the screen on the status bar. when you run your accounts just make a note of the transaction number.
To find back dated transactions run an audit trail report for transactions from that number plus 1 to 9999999 and for a date range from 010180 to the final date of the last accounting period. This will then list transactions dated prior to the current period entered after the management accounts were printed.
In practice most people elect to enter late invoices into the following period at the time of entry and avoid this issue. n.b. you still need to check as we are all human and errors can be made.
Fixed Assets & Depreciation
Sage includes a superb module for managing assets and their depreciation, a full explanation of it is available here
Accruals and Prepayments
If you buy a years supply of something in one go, then the profit for that period will be reduced unfairly as the years supply should be spread evenly of the coming twelve months. This also applies to quarterly arrangements such as rent where the cost should be spread over three months. Similarly if you get billed quarterly in arrears (perhaps with your phone bill) then you need to account for the current usage even though the bill has not arrived.
Accruals and Prepayments are a way of doing this without having to manually calculate the amount to release each month.
Before you start though you need to consider if this is something that needs to be taken into account, a £900 quarterly phone bill may not be a material amount if your overheads are £100000 per month, but could be if overheads were £10000 per month and certainly would be if overheads were £5000 per month. You need to make your own judgement dependant on the amount, the degree of accuracy you want and the cost of time in doing so.
Accruals work by removing the original cost from it's nominal code and storing it in the accruals account then each month the fraction of the cost is returned to the nominal account from which it originally came.
Prepayments work by putting the fraction of the anticipated cost from the prepayments accounts into the nominal code for the expected bill. At the end of the period (when the bill should have arrived) the provision is reversed out so that the actual cost is shown. (It is important to check that the bill has arrived otherwise you will get a strong negative value followed next period with a strong positive value)
If you have the Sage Payroll you can set this up to be done automatically from the payroll. We assume this is not the case.
The Wages journal is used to correctly record the actual cost of employment in the accounts. There are three components to the journal, the money paid to the staff, the money paid to the Tax man and the cost of employment (the sum of staff and revenue payments)
For example the cost of Tax and National insurance are posted to an account (2210) the total of staff payments are posted to the Net Wages account (2220) and the actual cost is posted to Gross Wages (7000). When the bank payments are made to employees they are made against 2200, when all wages have been paid the account should have a balance of 0, confirming no mistakes have been made. Similarly Tax and NI are paid against 2210 and the account should return to 0.
In practice Tax and NI may be recorded in separate accounts and the Gross wages may be split into multiple different accounts for different types of employees and different types of pay, you may want to see holidays, overtime, directors, production staff, and office staff in different parts of the accounts. These journals can therefore be quite complex in terms of how they are split but the fundamental principle is simple.
If you do want complex splits it may be worth having the payroll. For less complex arrangements journals can be memorised and recalled each month.
When you have completed your VAT return you should journal the value of VAT in Sales and Purchases to the reconciliation account, this separates the immediate short term liability of VAT to be Paid from the longer term liability of VAT that will not be paid for another three of four months. It also provide a way to check that the correct amount has been paid to the VAT man.
In the illustration above you would Debit the sales tax control account (2200) by 14325.53 and Credit Vat Liability (2202) by the same amount. Credit the purchase tax control account (2201) by 4073.97 an Debit the VAT Liability (2202) by the same amount. Note: The more recent versions of Line 50 now include an option to save all the details your vat return printouts in achieves, so there is no reason to have to print out a forest worth of paper to accompany each vat return any more.
Vat bank payments or bank receipts go against 2202 and should reset it's balance to 0.
The VAT control accounts now show only the accruing liability that will not be paid until the next VAT return.
To make this procedure easier, there is a wizard for it (in modules menu)
Scales charges keep changing so I will not risk stating any values here.
The principle is quite simple, some of the VAT you reclaim on vehicle expenses relates to the personal use of vehicles, the VAT man wants it back, rather than have everyone argue about how much personal use is made of vehicles a set charge is applied against each vehicle, the amount of the charge depends on the size of the engine and the fuel used. You can find out the current rates at the Customs & Excise website together with the full rules.
To make this procedure easier, there is a wizard for it (in modules menu) all you need to do is to add up all the scale charges for all the vehicles that have private usage and enter it into the wizard.
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