Year End Accounts Preparation: Nominal Ledger and Trial Balance
Service charges are either fixed or variable and are usually payable in advance because most leases need leaseholders to pay charges ‘on account’ for expenditure during the course of the financial year. So the year-end accounts (year end being the closing adjustment period of a company’s accounting year) are usually prepared on an accrual and prepaid basis. Accruals are items where expenses have been incurred during that period or year end where a) the benefits have already been taken by the company but the payments have not yet been made or b) services which have already been provided but payment has not yet been received. Prepayments occur when a debt or installment payment is made before its official due date and can be for the entire balance or for any upcoming payment that is paid in advance of the date for which the borrower is contractually obligated to pay it.
At year end, all the accounting records kept by the managing agent which are comprised of the vouchers, records and other information and explanations 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. It contains
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 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:
- The account name;
- The type of the account i.e. asset, liability equity, income, cost of goods sold, or expense;
- 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:
- Expenses codes;
- Cost centre code;
- Project codes.
The most common number system is:
- 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);
- 2,000 – 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;
- 3,000 – 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;
- 4,000 – 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;
- 5,000 – 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)’.
The accountants will adjust 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.
Our managing agent holds one physical bank account and their system allows them to allocate funds for the separate services carried out by what are called ‘notional accounts’. Typically each development scheme (block) has 4 notional accounts which in turn become trial balances in their own right, enabling the preparation of the year-end service charge accounts.
- Service Charge: This is where all income and expenditure for the service charge is recorded;
- Ground Rent: For managed schemes for which they also prepare the statutory accounts for the freeholder, the notional account becomes used to record the movement for these accounts, i.e. ground rent income which belongs to the freeholder.
- Reserve Fund: For our scheme this was established to link tenant debt that came across from the previous agent because they used to demand service charges and ground rent individually. The current system combines the contributions to these two funds to one figure. Receipts for these fall into notional account 1. The figures in this account are combined with that of notional account 1 when the service charge accounts are prepared.
- Directly Recovered Costs: The movement through this notional account is for referral fees collected from tenants when they are referred to our company solicitor for arrears recovery. These are distinct from both the service charge and freehold monies and are therefore administration charges.
All transactions on the system are reconciled to the physical bank account on a daily basis by the accounts receivable team.