What is a nominal code?

What are nominal codes for?

Sorting. Every transaction in the ledger has to belong somewhere, and the nominal code says where. A fuel receipt goes to motor expenses, a customer payment to the bank and to debtors, the accountant's bill to professional fees. Total each code and you have the lines of the profit and loss and balance sheet.

The codes are grouped in ranges so the structure is obvious at a glance. A widely used UK layout runs fixed assets in the 0000s, current assets in the 1000s, liabilities in the 2000s, capital in the 3000s, sales in the 4000s, cost of sales in the 5000s and overheads from 6000 upwards. Software varies in the details, and you can add or rename codes to suit the business.

The word 'nominal' is old bookkeeping vocabulary — the nominal ledger was the one holding the named accounts rather than the ones for individual customers and suppliers — and has survived mostly because accountants still say it.

A worked example

A plumber's software uses a standard layout. Over a week, four things happen and each lands on a code.

What goes wrong with nominal codes?

Miscoding. The copper posted to motor expenses does not change the total profit, but it makes materials look cheap and the van look expensive, and the gross margin figure is now wrong. Miscoding between the profit and loss and the balance sheet is worse: a van payment posted to motor expenses understates profit and overstates the loan.

The other failure is too many codes. A chart with separate codes for every supplier, or 'sundry' used for anything hard to place, defeats the purpose. A small business needs perhaps forty codes it actually uses, named plainly. Bizzle suggests the code for each receipt and invoice from the supplier and description, and shows what it did so a wrong guess is a one-click fix rather than a year-end surprise.