Bank Account: Notional Accounts, Nominal Ledger and Trial Balance
In order to better understand how the year end service charge accounts are prepared it is very useful to establish how the managing agent controls the service charge payments. Ours holds one physical bank account and their system allows them to allocate funds for the separate services carried out by what is called ‘notional accounts’. Typically each development scheme 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 was 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.
All transactions on the system are reconciled to the physical bank account on a daily basis by the accounts receivable team.
NOMINAL LEDGER AND TRIAL BALANCE
All service charge transactions are held in the nominal ledger (also referred to as the general ledger). 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 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)’.