The nominal ledger, also known as the general ledger, is the main accounting record for a company’s financial transactions. It is composed of a chart of accounts which are categorized as assets, liabilities, equity, revenue and expenses. The detailed financial transactions are recorded using a double-entry bookkeeping system, meaning that one of the accounts will be debited and another account related to the transaction will be credited.
The accounting cycle is a set of procedures that occur to accurately record and process financial transactions for a business. The accounting cycle includes the processes of journalizing, posting, trial balance preparation/adjustment and financial statement preparation. The nominal ledger is central to the accounting cycle. At the beginning of the accounting cycle, the dispositions of financial transactions are posted to the appropriate accounts in the ledger. At the end of the accounting cycle, subsequent processes use the nominal ledger to create financial data.
Journalizing involves recording each transaction in the general journal using a journal entry. The general journal keeps a record of all the journal entries for a business in chronological order. The journal entries represent a debit to an account and a credit to a different account. These are the same accounts that are represented in the nominal ledger
In set intervals, such as weekly or monthly, the transactions recorded in the general journal are posted to the individual accounts in the nominal ledger. Posting the transactions against the appropriate account in the nominal ledger helps to ensure that the financial state of a company is accurate, so the company is able to determine its profitability, as well as withstand audit requirements.
The trial balance provides the balance of all the accounts in the nominal ledger for any given day. Essentially, it is a snapshot in time of a company’s financial picture. The debits and credits recorded against the accounts must be equal. If the credits and debits don’t balance, an error has occurred while recording one or more transactions, and the error must be corrected.
When all the transactions are entered into the general journal, posted in the nominal ledger, and the trial balance is verified and adjusted as necessary, the financial statements can be prepared. The balance sheet, income statement and cash flow statement are created from data in the nominal ledger’s chart of accounts. The balance sheet shows how a company balances its assets against its liabilities and equity, while the income statement provides a statement of the company’s revenues and expenses for a specific period. Generally, the statement of cash flow reports cash receipts and payments based on the transactions recorded to the cash account in the nominal ledger.