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At the year end, (the closing adjustment period of a company’s accounting year) all the accounting records kept by the managing agent are passed to the external accountants along with the nominal ledger (also known as the general ledger) which is where all the service charge transactions are held.

This ledger contains accounts of each asset and liability and supports the trial balance, which is in turn based on double entry book-keeping. This means that every accounting transaction has 2 parts or ‘sides’.

The records are comprised of the vouchers, records and other information and explanations provided by the managing agent. The accountants will then go through the process of adjusting each entry on the nominal ledger through the trial balance in order to properly state them for the purpose of preparing service charge financial statement at the end of the year. Those adjustments cover such reasons as mis postings, reversal of opening balances, timing differences for accruals and pre-payments and additional invoices for late payments.

THE TRIAL BALANCE

The trial balance usually consists of 4 columns showing a list of all the balances contained against each nominal code. The nominal code allows all transactions (sale or purchase) to be traced and all codes are either held in the Chart of Accounts, (which provides structure to the general ledger) or in the general ledger account number which is automatically assigned by the accounting software and split into three columns:

  1. The account name;
  2. The type of the account i.e. asset, liability equity, income, cost of goods sold, or expense;
  3. A description of the type of transaction which should be recorded in the account, i.e. a debit entry or a credit entry.

In addition to holding Nominal Codes, the Chart of Accounts may also hold:

  1. Expenses codes;
  2. Cost centre code;
  3. Project codes.

The most common number system is:

  1. 1,000 – 1,999: Asset accounts: These are Cash, Accounts Receivable (the most liquid assets behind cash) Supplies, Inventory,and Land (or any other asset that can be sold to be converted into cash to pay off current liabilities);
  2. 2,000 – 2,999: Liability accounts: The Liabilities section is found in the Balance Sheet, opposite the Asset section and listed in order of payment terms, from shortest to longest. Liabilities are an integral part of the Fundamental Accounting Equation on which all accounting/bookkeeping is based on: Assets = Liabilities + Owner’s Equity;
  3. 3,000 – 3,999: Equity accounts: These represents the leftover interest in the assets of an entity after all liabilities are covered, spread over the individual stockholders. When the owners of a business are stockholders, this is referred to as stockholders’ equity. It appears in the Balance Sheet, usually below the assets and liabilities sections;
  4. 4,000 – 4,999: Revenue accounts (Sales and Cost of Goods Sold): Revenues are made largely with the sale of goods and services and can be found at the top of the Profit and Loss Statement, above the section of Expenses. The reason the Profit and Loss Statement is constructed in such a way is to calculate Net Income, which is equal to Revenues – Expenses;
  5. 5,000 – 6,999: Expense accounts: Technically an expense is where an asset is used up or a liability is incurred. With regards to the accounting equation, expenses effectively reduce owner’s equity. Some expenses that are common to almost all businesses, are rent, wages and interest expenses.

Running The Trial Balance

When the trial balance is run, for every transaction the value of the debit balance column and the credit balance column must have the same totals to agree i.e. one negative and one positive – giving a net balance of zero.

The extended accounting equation must balance: ‘A (Assets) + E (Expenses) = L (Liabilities) + OE (Owners Equity) + R (Revenues)’.

Therefore, ‘Debit Accounts (A + E) = Credit Accounts (L + R + OE)’.

REPORT ON FACTUAL FINDINGS

Whilst many leases written after 1980 contain a provision for them to be prepared and audited, as per the ICAEW Technical Release  03/11, leases written before then tend to be less specific. Freeholders or managing agent can therefore consider whether the terms can be interpreted and acted upon at the time they were written. However, great care has to be taken here because any interpretation could be challenged by lessees and, if taken to the First Tier Tribunal, could mean that the landlord might not recover the charges. Our leases fall into the latter class so instead a ‘report on factual findings’ is carried out which can be read about here.

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