Table of Contents
Introduction
Welcome to this article! Here, you'll find some of the basic principles of accounting explained in a clear and approachable way. If you're just starting out, this guide will help you begin your accounting journey on the right foot—without getting lost in complicated jargon,🤞 when possible.
But this isn’t just for beginners. We’ve also crafted it for the nostalgic souls who once sat through accounting classes and want to revisit the fundamentals.
So, what are you waiting for? Dive in to explore journals, postings, ledgers by understanding in which part of the accounting cycle they are involved.
Power up your accounting knowledge. 👇
The Accounting Cycle
The Accounting Cycle is the step-by-step process businesses follow to track their financial activities as part of Financial Accounting.
As for Financial Accounting, it refers to the process of 🔍 identifying, ✍️ recording, 📋 summarising and ✅ analysing an entity's financial transactions and ⚖️ reporting them in Financial Statements.
Each step of the accounting cycle is deeply connected to the key elements of financial accounting mentioned in the above definition.
🔍 Identifying transactions.
✍️ Create journal entries to record transactions.
Follow the double-entry method.
✍️ Post to Nominal Ledger.
📋 Run unadjusted Trial Balance.
✅ Post adjusting entries (Accruals, Prepayments, Provision, Depreciation etc.)
📋 Run post-adjustment Trial Balance.
⚖️ Create Financial Statement reports.
✅ Post closing entries to finalised accounts for the period.
If you're more of a visual learner, the cheat sheet below will help you grasp the bigger picture of the accounting process and reinforce key concepts as you go.
⬇️ Moving forward, we’ll focus on the first three steps of the accounting cycle and take a closer look at what the journal, nominal ledger, and postings are all about ⬇️.
What does a Journal Entry look like?
We've seen that a journal entry is a record of a financial transaction which credits and debits at least two accounts in the Nominal Ledger, according to the double-entry method. It's also important to add that journals are generally used for transactions that don’t involve a supplier or client invoice, or when you need to make adjustments. A journal should show at least:
A credit line and a debit line per transaction.
The credit affects an account while the debit another one.
A description for each line for better clarity.
A posting date.
The posting date is the date on which a transaction is entered into the accounting system and affects the financial period.
A reference to the source document (e.g. Invoice, receipt, bank statement)
Matching and offsetting credit and the debit amounts, balancing the journal total out to zero.
For the sake of simplicity, the sample journal above doesn't include VAT. However, in your daily accounting routine, you’ll typically apply VAT rates based on the goods or services you’re selling (or purchasing). Learn more about VAT rates in Indigo Accounting 👉 here.
Once the journal is posted selecting a VAT rate, the system will automatically record the calculated VAT amount in the VAT Control Account. This automation simplifies the entire VAT Return process. Read more about it 👉 here.
What is a Ledger?
Think of your accounting system as a library. Inside this library, each ledger is like a book that tells a different story about your money.
Nominal Ledger: this is the master book. It summarises every transaction from all other ledgers, giving you the complete financial picture of your business.
Sales Ledger: this book focuses on your clients. It records every invoice you send, every payment you receive, and any other transaction related to money coming in.
Purchase Ledger: this book is about your suppliers. It tracks the bills you receive, the payments you make, and any other transaction related to money going out.
🎯 In simple terms...
Nominal Ledger = The master record for all transactions.
Sales Ledger = Who owes you money.
Purchase Ledger = Who you owe money to.
Every time you record a transaction in the Sales or Purchase Ledger, it’s automatically reflected in the Nominal Ledger, as your accounting system—Indigo Business, of course—creates the corresponding entries for you.
📐 Same transaction, different angles
The Sales and Purchase Ledgers give you detailed views of the clients' and suppliers' financial position with your business.
The Nominal Ledger shows the overall financial story also thanks to the Sales and Purchase ledgers contribution. This is crucial for generating management accounts and comprehensive financial statements
How do Postings end up in the Nominal Ledger?
Through journals (e.g. adjusting entries, bank fees, year-end closings etc) into the Nominal Ledger going to Nominal > Posting > Journal.
Through financial transaction (invoice, credit note, etc) in the Sales or Purchase Ledger, since they trigger postings into the Nominal Ledger too.
Now, let's go though some real case scenarios 🤓 for a deeper understanding on how Indigo Business deals with journals and transactions within the Nominal Ledger.
Journal Entry Example
Journal Entry Example
You've got a transaction for electricity consumption to record, but you haven't received the bill yet. However, you're pretty sure that you've consumed electricity for an amount of approximately 400 euros.
You call this type of transaction an Accrual, because you've used the electricity in the past but you haven't received an invoice or made the payment yet.
Expenses should be recorded as they're incurred (accrual accounting), therefore you'll create and post a journal entry as follow (refer specifically to Account and Posting columns):
Account | Account's balance BEFORE posting | Posting | Does it Increase ⬆️ or decrease ⬇️ the account's balance ? | Account's balance AFTER posting |
10000€ | debit 400€ | ⬆️ | 10400€ | |
5500€ | credit 400€ | ⬆️ | 5900€ |
ℹ️ Overhead Expenses account: it's an operating expense account.
Purchase Invoice Example
Purchase Invoice Example
Let's say you got a 250€ invoice from Supplier A (VAT incl.) due to purchasing stationery. Now you need to record it in the Purchase Ledger and see how this impacts your Nominal Ledger before and after you pay it.
Four accounts will be involved to record the whole process:
Accounts Payable account (liability account)
Stationery (expense account)
Bank Account (asset account)
VAT Control Account (asset account)
1️⃣ Purchase Invoice in Nominal Ledger (before payment)
Create a purchase invoice in the Purchase Ledger selecting the Supplier A.
The system will automatically generate the below transaction in the Nominal Leger:
Ledger | Account | Debit | Credit |
Nominal Ledger | Accounts Payable | - | 250€ (to increase ⬆️ liabilities) |
Nominal Ledger | Stationery | 211.86€ (to increase ⬆️ expenses) | - |
Nominal Ledger | VAT Control Account | 38.14€ | - |
2️⃣ Purchase Invoice Payment in Nominal Ledger
Go to Supplier A in the Purchase Ledger and allocate a payment for the purchase invoice you've previously recorded.
The system will automatically generate the below transaction in the Nominal Leger:
Ledger | Account | Debit | Credit |
Nominal Ledger | Accounts Payable | 250€ (to decrease ⬇️ liabilities) | - |
Nominal Ledger | Bank Account | - | 250€ (to decrease ⬇️ assets) |
Journal vs Invoice
Journal vs Invoice
Based on the examples above, you might think: why not record an expense straight into the Nominal Ledger instead of passing through the Purchase Ledger?
It's actually possible to directly record such an expense in the Nominal Ledger. However, you wouldn't have visibility into what you owe to each supplier—only the total owed to all suppliers. While this is useful for getting big picture and for financial reporting, it can be extremely difficult when it comes to tracking and managing you financial relationship with every single supplier.
Still not clear? Check below how the balances perspective change depending on whether you look at the Nominal Ledger or Purchase Ledger.
Nominal Ledger View in Indigo Business
Go to Nominal > Nominal Accounts, and look for the Accounts Payable account. Under the Balance column you'll see the total you owe to your suppliers. If you click on the balance, a window will open.
☝️ Here, you can see the list of the transactions making the total balance, the supplier each transaction is associated to, but not the total balance owed per supplier (e.g. Supplier A).
Every time you input a purchase invoice, the Accounts Payable's balance will increase accordingly.
Purchase Ledger's Supplier View in Indigo Business
Go to Purchases > Suppliers, and look for a supplier (e.g. Supplier A). Under the Payables column you'll see the total you owe to it. If we click on the supplier's payable value, a window will open.
☝️ Here, unlike the Nominal Ledger, you can see the list of the purchase invoices making up the balance you owe to this specific supplier.
When you allocate a payment to one of the invoices, the Payables amount will decrease accordingly.
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