When are Nominal Accounts Needed?
Nominal accounts are needed for three purposes:
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Producing accounts – The Accounts Formatter can only pick up balances from accounts on the Trial Balance, it cannot display individual entries. Usually the Accounts Formatter is used to produce all the accounts apart from the Investment Schedule and possibly a Dividend Schedule. So if the accounts show a list of bank accounts or a list of payments to beneficiaries then each item in the list needs to be a separate nominal account.
If a long list of transactions is required (e.g. if a long list of payments to beneficiaries is required), then it may save time to post all the payments to a single account and attach a nominal ledger print to the accounts. This could be quicker than setting up a new account for every payment.
However most users would set up one account for each beneficiary and show just the total paid to each beneficiary without the date of payment.
- Control purposes - Some nominal accounts are used for control purposes even though they do not appear in the final accounts. The most obvious example is the Suspense Account. By the time the accounts are produced this account should have a zero balance. Another example is the Income Bank Account. Some users check the Income Bank Account to determine whether there is enough cash available to make a distribution to the income beneficiaries. However the accounts themselves often show only the total bank account balance (i.e. for both income and capital).
- Tax purposes - Sometimes figures are needed for the purposes of tax return preparation which can be most easily obtained when the accounts are prepared by using separate nominal accounts. For instance, if UK tax returns are being produced without using the link to PerTAX then some users post Dividends from UK Unit Trusts to a separate account.
Normally the Income and Expenditure Account shows only ‘Income from investments per schedule’. The figure for Dividends from UK Unit Trusts is only used for tax return production. However most of these accounts are no longer necessary as the system can determine the nature of investment income by looking at the security.
So a general rule is that nominal accounts are mainly used for producing the accounts with extra accounts occasionally used for control or tax purposes.
Keeping the chart of accounts simple is likely to reduce posting errors.