NOMINAL LEDGER OVERVIEW

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See the NOVUS Walkthrough Guide for general information about the system.


The nominal ledger (NL) may seem difficult to understand in terms of accounting, but the basics of the nominal ledger are simple.

Businesses spend money and hopefully make money. This core information will give two figures over any period of time: the amount of money the business received, and the amount of money the business spent. This is important information, particularly for a small start-up business, since this details whether the business is making any money or not.

The nominal ledger is the name given to the list of the nominal codes (accounts) that are set up within the accounting structure. This list of NL codes is known as the ‘chart of accounts. This details all of the different pots into which transactions can be allocated.

Nominal codes are assigned against every invoice, credit and payment transactions etc. so that each nominal account will include debit and credit transactions, i.e. amounts that go into the pot, and amounts that come out of the pot.

Usually, the nominal ledger gives the current debit and credit totals for each nominal account as well as access to each of the individual nominal accounts so that the individual transactions that make up those totals can be viewed.

The profit and loss account of an insurance company shows the transactions carried out by the company during the financial year.

There are two types of nominal ledger accounts; ‘balance sheet’ and ‘profit and loss'. Balance sheet accounts are used for the current and fixed assets/liabilities of a business. A balance sheet account has a value that is carried forward from one year to the next, e.g. a bank balance or debtor balance, it will have the same balance at the close of business in year one and opening of business in year two. Profit and loss accounts record income and expenditure, e.g. brokerage or telephone costs. Balances on these accounts are not brought forward from year one to year two. At the opening of business in year two, there will be zero income and zero expenditure. The sum of the p&l items indicates the profit made by the business.


Terminology

In this guide the terms ‘soft’, ‘source’, ‘non-banking’, and ‘convertible’ are synonymously intended to mean non-banking currencies, i.e. those currencies in which no bank account exists.

‘Banking’, ‘hard’, ‘destination’ are synonymously intended to mean banking currencies, i.e. those currencies in which one or more bank accounts exist.

Base currency is the currency on which the rates of exchange in the currency table are based. This is not necessarily GBP although that would be the most likely base in the UK. The base currency is specified in the system parameters SYSP program table.

When rates of exchange are entered by the user, the destination currency is always specified. An input of ZAR/USD would be accompanied by specifying the rate of exchange of ZAR to USD. Rates of exchange are not necessarily with respect to GBP.


Program names.

For the sake of clarity, programs in this guide are referred to by their specific name. However, as the system allows the user to rename programs and reconfigure the menu structure, the names on your system may not be the same as the names in this guide.


System Parameters

The system parameters SYSP program table holds details of the nominal ledger accounts to be used for:

- Profit and loss (reserves) 
- Exchange gain/loss 
- Bank charges, interest and transfers 
- Write-offs (banking currencies) 
- (Separate) accounts for banking and non-banking currencies for debtors, creditors, brokerage and other revenue (fees) transactions. 

These must be set up before any processing to the NL is attempted. The system differentiates between brokerage and other revenue from such sources as policy fees, and admin fees created in the course of IBA (insurance brokerage account) transaction entry. This account is also used to control taxes such as IPT, South African tax etc. The nature of the fee/tax is recorded on the IBA by the TAX_CODE field.

Prior to using the cash book, appropriate NL accounts must be set up for the bank accounts concerned in the BANK maintenance program. Period cash totals are linked to their respective NL account for the bank concerned.


Calendar

Both the NOVUS nominal ledger, the NOVUS IBA ledger and the NOVUS purchase ledger (PL) reference a common calendar. Details of the CALENDAR program can be found on the IBA_User_Guide page of this wiki. A few points relevant to the understanding of this section are repeated here.

The calendar defines the ‘current’ period - more accurately described as the ‘earliest open period’. No entries can be made to either the IBA or PL prior to the current period. Periods prior to the current open period are 'blocked'. Note, however, that direct NL postings are still permitted to block periods until such time as the PERIODEND program is run, at which point the period is 'closed' and no further posting can take place to any ledger.

Periods do not have to follow the Gregorian calendar. Nevertheless, if there is a period for March, for example, at the end of March the CALENDAR program should be used to increment the earliest open period (to April). April then becomes the earliest open period and March is blocked. This situation enables the accounts department to reconcile March. At this stage, under suitable control, March can be re-opened (by setting the earliest open period back to March) to allow strategic IBA entries to be made into March. Manual journals can be posted.

Once April has been set as the earliest open period, the end of period processing for March can be run using the PERIODEND program. This March is then defined as closed. March can now no longer be re-opened.

Because of the way, the trial balance program is designed, it is not necessary to carry out the end of period processing in order to produce a trial balance, a real-time trial balance can be produced at any time. However, it is recommended as a matter of good housekeeping that end of period processing is carried out soon after a period is closed to prevent inadvertent posting to earlier periods.

End of period processing must be carried out in period sequence.

Additional processing checks are carried out for year-end processing.

Ad Hoc NL Feeds

Direct User Feed

The NLPOST program provides direct input for NL journals into the nominal ledger.


Direct System Feeds

Banking currencies The system creates direct ad hoc feeds to the nominal ledger from:

- Write-offs during cash matching 
- NL cash entry via cashbook

Convertible currencies

Convertible currency records are written to the NL on an ad hoc basis for every convertible transaction written to the IBA account. If conversion occurs during the current financial year then these records are deleted and replaced by corresponding amounts in banking currencies embodied in the IBA period totals for the period in which the conversion occurs. Note there is a date shift in the IBA. If conversion has not occurred by the end of the year the records remain in the NL added to which are exchange gains and losses records created by the revaluation carried out as part of the end of year process.


Bulk NL Feeds

Banking Currencies

The IBA creates the following bulk feeds:

- Transaction totals (including IBA cash and transfer journals) 
- Brokerage 
- Other revenue fees 
- Cash – bank account element only 

The feeds take place automatically when IBA/cashbook transactions are entered. The period totals (the CFWD less the BFWD amounts) encompass IBA debtor/creditor transactions, IBA account journals and IBA cash, entered via the cash book. The end of period routine checks the totals of all balance to zero and differences between debtors and creditors are cross-checked against brokerage/other revenue totals.


Journal Types and Batch Numbering

The batch number, journal type and narrative identify the type and origin of the various types of records in the nominal ledger as shown in the table below.

Batch No Type Narrative
Direct Journal
Sequential||’J’
User defined
User defined
Convertible items
ITN
S
ITN||‘*’||date
Write-off (matching)
ITN
W
‘Write-off’
Gain/Loss (matching)
ITN
G
‘Ex gain/loss’
Revalue (year end)

Year||’RV’

R
ITN||’+’||date

Or ‘Ex gains losses’

Conversion – revalue
ITN
R
ITN||’.’||date
Conversion – contra
ITN
C
ITN||’/’||date
New year journals
‘YB’||year
Y
‘Year end posting
End of period
Year||month
P
‘Period’||desc.


ITN = IBA Transaction Number.
Month = MM
Year = YYYY
Date = YYYYMMDD
Desc = BROK, CASH, CLIENT or COMPANY


IBA Transactions

Transactions in banking currencies or soft currency transactions on conversion are aggregated into the period totals (see below) analysed by currency, division (of the relevant policy), client (debtor) or company (the creditor). These period totals have a journal type ‘P’ in the NL. A breakdown of the transactions that make up the ‘P’ type journals is available in the EPERIOD program. See the period totals section below for further details.

Inter Divisional NL transfer

The NLTRANS program is used to transfer cash from one division to another. The date of transfer must be in an open period which may be blocked, but PERIODEND must not have been ran.

Only nominal ledger (NL) accounts of type T are returned

Cash

Cash may be entered either through the cashbook or directly into the NL (if appropriate) using the direct posting program PLPAY. The cashbook is designed for both IBA cash such as the settlement of premiums and claims as well as non-IBA cash such as wages, bank charges, interest etc. It is recommended that the cashbook is used for all cash to facilitate an easy bank reconciliation.

Cash is entered, linked to a specified bank account, and allocated to a specific division. The bank account defines the currency and NL account.

The system processes cash differently depending on whether it is IBA or NL cash.

In both cases, entries are made to the cashbook for reconciliation purposes with the bank statement. The system supplies the next available transaction number automatically for each record when entered.

In the case of IBA cash, this is posted directly to the IBA ledger against the specified IBA account. IBA cash is aggregated into the period totals as ‘client’ or ‘company’, debit or credit.

The period totals should always balance the IBA ledger. The bank element of the IBA cash entry is aggregated into the cashbook period totals and NL 'P' type journals. Similarly, brokerage and other revenue fees are aggregated into P type NL journals.

For further details of the period, transaction totals see the period totals sections below.

NL cash is written both to the cashbook and also directly to the nominal ledger. The system uses the IBA transaction number as the NL batch number which makes for easy reconciliation. The only purpose of the IBA account in the case of NL cash is to assist with the bank reconciliation - a dummy account code could be used.

Purchase ledger entries are written directly to the PL and NL.


Brokerage

Brokerage emanating from transactions in banking currencies or when converted to a banking currency is aggregated into the period brokerage totals analysed by (policy) division and currency.

By default, the brokerage is written to the IBA ledger against the XBK account.

Just as policies are tagged to a division, they are also tagged to a brokerage account (currently ‘XBK’ for all policies) but the system could be modified if different brokerage accounts were required for different types of policies, class of business etc.

The fixed fees module allows other types of revenue entries such as legal fees, IPT (Insurance Premium Tax), policy fees, and consultancy fees to be written to other specified IBA accounts. The system allows any known tax or fee structure to be created using user-defined IBA accounts, similar to ‘XBK'. The NL account for these ‘fixed’ fees is set up in the system parameters SYSP program table.

Opening Balances

The TBOPBAL program enables the creation of opening balances for a division and currency. Opening balances can only be created once for each division and currency, and have not been previously posted. For more information see the TBOPBAL page on this wiki.

Taxes

Taxes resemble fees in many ways. Both taxes and fees can be added to a transaction ‘on the fly’ and different taxes and fees can be applied to a single transaction. Whereas a fee requires the specification of an IBA account e.g. XBP for policy fees or XBA for admin fees, taxes apply between IBA accounts. Taxes also are expressed in percentage terms (of the order per cent amount) whereas fees can be either percentages or monetary amounts.

NOVUS slightly bends the meaning of these two descriptions by specifying that taxes will apply to all instalments, whereas fees will apply to the first instalment only. NOVUS also provides the facility to advance taxes to the first instalment if required.

Both taxes and fees are analysed to the revenue fees NL account. The IBA ledger stores details of the transaction at the lowest (exploded) level and each type of fee/tax is identifiable by its unique tax code. For example, a £100 premium passing to two insurers in a 60/40 split both agreed to a 10% brokerage charge carrying 6% IPT and a £5 policy fee would look like the below on the IBA:-

Tax code
CL * 100.00

CL* 6.00
c
CL* 5.00
p
INS1 . 54.00-

INS1 . 3.60-
c
INS2 . 36.00-

INS2 . 2.40-
c
XBK 10.00-

XBA 5.00-
p


Period Totals

Period totals apply to entries in banking currencies – either when entered in a banking currency or when converted to a banking currency.

There are period totals for:

- Transaction totals - technical entries, transfer journals and IBA cash 
- Brokerage 
- Bank (cash) 

These totals can be inspected using the period totals enquiry screen which includes a print option for a breakdown of the totals if required for audit purposes.

The above totals are brought into the NL as a set of consolidated (P type journals) entries for debtors, creditors and brokerage for each division and currency. The cash component of the debtors' and creditors' entry is balanced by the IBA component in the bank totals. There will be brokerage entries against both the pure brokerage (premium) NL account and the ‘fixed’ fee revenue account.


Transaction Totals

Shown below is a typical period summary for a given period, division and currency. The screen shows that the previous period has been closed because there is a balance brought forward figures. The period shown has not been closed (as there is no balance carried forward figures i.e. the end of the period has not been run for this period). Its status is open (unless blocked for a particular reason).

The period’s activity comprises transactions, cash, transfer journals and zombie extract (a special process of setting records to a ‘zombie’ state due to companies being in run-off). In the example below, there is a net client debit of GBP 45,465.82 and a net company credit of GBP 9,819.65 which will be written to the debtors and creditors' accounts respectively (as set up on the system parameters SYSP program table) at period end. Both these entries include client and company IBA cash but exclude brokerage.

The brokerage for this period is also shown on this screen although brokerage is not included in the transaction period summary figures. The brokerage may be seen to be GBP 646.17 credit split between the normal brokerage account (70000) and the fixed fee revenue account (70500).
At period end, a balanced posting to the NL is achieved from the three separate feeds:

1. Period summary Totals 20000 45,465.82 30000 9,819.65-

2. Cash summary totals (bank element) Bank A/C’s 35,000.00-

3. Brokerage summary totals: Brok A/C’s 646.17-



End of period processing cannot be carried out unless the period totals net to zero and differences between the transactions are balanced by the brokerage.

NOVUS produces a trial balance to include the current period before the IBA period totals have been posted to the NL. The same method is adopted when producing projected trial balances to a future date.

Cash Totals

The system aggregates IBA cashbook entries into period cash totals by the bank. NL based cashbook entries are written immediately to the NL.

The end of period routine brings the bank side of the IBA cash into the respective bank account accumulators – the debtors/creditor side forms part of the period summary totals described above.

NL cash can also be entered directly into the nominal ledger using the NL direct entry program but so doing will bypass the cash book.


Brokerage Totals

The system aggregates brokerage into the period totals either when banking currency transactions are entered or non-banking transactions are converted. Two NL accounts should be set up in the system parameters SYSP table, one for pure brokerage arising from premiums, and the other for revenue arising from other types of fees and taxes e.g. consultancy fees, North American tax, VAT etc. Both these have convertible and banking currency counterparts.

Trial Balance

As described above, debtor, creditor, cash and brokerage totals for banking currencies are only brought into the NL at period end. Without a suitable work-round, running a trial balance mid-period would not find totals for the current (earliest open) period and similarly, there would be no NL records for the IBA for future periods. The trial balance figures for periods that have not been closed are subject to change as further transactions are entered. A trial balance covering the current or future periods must be regarded as ‘projected’ or ‘provisional’.

The TRIBAL program includes options to report on convertible currency records at either their booked rate of exchange or at the prevailing rate of exchange. This enables unrealised gains and losses to be determined for management reporting purposes.

In NOVUS, unconverted convertible currency records must be brought into the period totals on conversion or at year-end - whichever occurs first. If converted, the user specifies the ROX; if unconverted at year-end then the end of year rates of exchanges apply. The same rate of exchange must be used to convert both debtor and creditor lines so there is no gain or loss arising due to the conversion process itself. This is referred to as the ‘pay as paid’ principle. Prior to conversion, NOVUS regards the soft currency NL entries as temporary – they get deleted (a contra option could be provided if required) on conversion if the conversion occurs in the same financial year. So, prior to conversion or year-end (whichever happens first), only unrealised gains and losses apply and these are handled by reportage as described above.

At year end, however, a GBP equivalent must be assigned to the convertible records so that auditable accounts can be prepared. Brokerage remains unrealised at this stage. Hence the brokerage must be committed to the NL at a suitable rate of exchange - the prevailing end of year rates preserved in the year-end ROX table. And at the same time, any unrealised gains and losses between the date of entry and the end of the year can be reported. Thereafter a ‘line in the sand’ can be deemed to exist so that any further unrealised gains and losses (ascertained by reportage) or gains and losses arising on conversion (accompanied by NL gains/loss entries) can be calculated from the year-end position. There will likely be additional gains/losses when these records are converted in the following financial year or at the end of the following year if this occurs first.

In summary, unrealised gains/losses can be ignored (i.e. address the issue by reportage) if conversion takes place within the same financial year. If conversion has not occurred by year-end, then the gains and losses up to the year-end can be addressed by reportage but there is no actual gain/loss as far as the trial balance is concerned. Soft currency records (including brokerage) must be brought into the accounts in banking currencies at year-end and, conversion in the following (or subsequent) year will be subject to gains losses between this year-end position and the conversion date (or the next year-end if this occurs first).

For example, an IBA premium transaction expressed in soft currency equivalent (at the time) to £100 debtors and £90 creditors might be valued at £80 and £72 respectively at the end of the year because of the change in the rate of exchange. At this point, an unrealised exchange loss of £2 arises viz. £20 loss from the debtor less £18 gain from the creditor. Such a gain/loss is of no consequence to auditors – internal reportage will suffice. However, these items must be brought into the trial balance at the end of the year exchange rate.

If settlement of this debt takes place the following year, further changes in the rate of exchange might mean that only a £70 premium is received. This gives rise to a realised £10 debtor exchange loss for this year which must be shown on the NL in the gains/loss account apportioned over debtors and creditors. Provided settlement takes place to the insurers at the same rate of exchange (=£63) then the further loss for this year will be £1 i.e. the £10 debtor loss less the £9 creditor gain.

Because NOVUS converts the entire transaction (clients/insurers/brokerage) from soft to banking currency at the same rate of exchange, settlement to the insurer would normally be at the same rate of exchange as that applying to the client. The gains and losses should be computed from the client and insurers separately but if the same rate of exchange is used for debtors and creditors this is tantamount to computing the gain/loss from the brokerage. In the example above, the recorded brokerage at end of the year was £8 having undergone a £2 loss during the first year (initial brokerage = £10, closing brokerage = £8). By applying the same factor (7/8) as that applied to the premium settlement, the re-valued brokerage on conversion works out at £7, i.e. a loss of £1 between the start of the year and the date of conversion. The total loss between initial IBA entry and conversion is £3 (split over two years).

At year end, the system projects to a fully settled position. If a settlement has been made on one side only, the transaction must be converted (in order to match the cash) so at year-end, the assumption is implied that settlement to the other side will be at the same rate of exchange. Provided the same rate of exchange applies to clients and insurers, gains and losses can only arise where brokerage applies i.e. gains/losses occur on premium traffic, not claims – or, the gains/losses on claims will balance each other out.

If the cash received differs from the debit amount at its booked rate of exchange (with or without any handling charges that may apply) the normal course of action is to convert the complete transaction at the ROX to match the debit. If this ROX results in a mismatch when matching the opposite side of the transaction, the difference can be written off to the exchange gains/losses account in the course of cash matching. Alternatively, some other rate of exchange can be chosen to convert the transaction and the mismatch on the debit cash can be written off either to the gains/losses account and/or the write-off account.

End of Year Processing

The end of the year program performs the following functions:

It converts all convertible currency records into their banking equivalents in their nominal ledger account counterparts (See below). Hence, a ZAR/USD in the debtor convertible currency account will be converted to USD at the end of year rate of exchange (option 1 above).

For example, a typical NL account configuration might be:

- Convertible Ccy Banking Ccy equivalents 
- Debtors 21000 20000 
- Creditors 31000 30000 
- Brokerage 71000 70000 
- Other revenues 71500 70500

The YEAREND program aggregates all P&L records into the P&L reserves account as set up in the SYSP program table. The batch number for the end of year routine is identified by ‘YB’ (year beginning) followed by the new year e.g. for the 2018/2019 year boundary this will be YB2019. This is written to the first period of the new year i.e. 201901.

At year end, the 21000 and 31000 records will be converted (to USD, GBP etc) into their counterparts 20000 and 30000 respectively. The 80100 records will be similarly converted and coalesced into the P&L reserves account shown below as 01001. The new year journal might look like the below:

Acc Div Posted Type Narrative Cur Amount Base ROX
01001 X 28-JAN-2019 Y Year end record GBP -572.67 GBP 1
01001 X 28-JAN-2019 Y Year end record GBP 336.27 GBP 1
01001 X 28-JAN-2019 Y Year end record USD -711.75 USD 1
01001 X 28-JAN-2019 Y Year end record USD -5.83 USD 1
20000 X 28-JAN-2019 Y Year end record GBP 1273.25 GBP 1
20000 X 28-JAN-2019 Y Year end record USD 3864.93 USD 1
30000 X 28-JAN-2019 Y Year end record GBP -1036.85 GBP 1
30000 X 28-JAN-2019 Y Year end record USD -3147.35 USD 1


Note the ‘Y’ (year boundary) system journal type.

Version History

v4.2.0 – Updated to the latest version