Introduction

This article explains some of the basic principles of accounting 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.

This guide 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, and ledgers by understanding how they fit into the accounting cycle.

The Accounting Cycle

The Accounting Cycle is the step-by-step process businesses follow to track their financial activities as part of Financial Accounting.

Financial Accounting refers to the process of:

🔍 Identifying transactions
✍️ Recording transactions
📋 Summarising financial data
✅ Analysing financial results
⚖️ Reporting all the above in Financial Statements.

Each step of the accounting cycle links directly to these activities.

Key Steps

🔍 Identify transactions.
✍️ Create journal entries to record transactions, using the double-entry method.
✍️ Post entries to the Nominal Ledger.
📋 Run an unadjusted Trial Balance.
✅ Post adjusting entries (like Accruals, Prepayments, Provision, Depreciation etc.)
📋 Run a 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 gives an overview of the accounting process and helps reinforce these key concepts as you go.

⬇️ Next, we’ll focus on the first three steps of the accounting cycle and take a closer look at journals, the Nominal Ledger, and postings.

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.

Journals are generally used either when transactions don’t involve a supplier or client invoice, or when you need to make adjustments.

A journal should show:

A credit line and a debit line per transaction.
- The credit affects one account while the debit affects another.
A clear description for each line.
The posting date, which 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 debit and credit amounts, so the journal balances to zero.

For simplicity, the sample journal above doesn't include VAT. In day-to-day accounting, VAT rates are usually applied based on the goods or services you’re selling or purchasing). Learn more about VAT rates in Indigo Accounting 👉 here.

When you select a VAT rate and post the journal, Indigo Business will automatically record the calculated VAT in the VAT Control Account. This automation simplifies the 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 part of your financial story.

Types of Ledgers

Nominal Ledger: the master record. It summarises all transactions from the other ledgers, giving a complete financial picture of the business.
Sales Ledger: focuses on clients. It records sales invoices sent, payments received, and any other incoming transaction.
Purchase Ledger: focuses on suppliers. It tracks purchase invoices, payments made, and any other outgoing transaction.

🎯 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 Views

The Sales and Purchase Ledgers provide detailed views of individual clients' and suppliers' balances.
The Nominal Ledger shows the overall financial situation thanks to the Sales and Purchase ledgers contribution. This is crucial for generating management accounts and comprehensive financial statements

How do Postings Reach the Nominal Ledger?

Postings make it into the Nominal Ledger in two main ways:

Through journals, like adjusting entries, bank fees, year-end closings, the Nominal Ledger going to Nominal > Posting > Journal.
Through financial transactions (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

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 approximate amount of 400 euros.

This type of transaction is called 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), so you'll create and post a journal entry as follows (refer specifically to Account and Posting columns):

Account	*Balance BEFORE* posting**	Posting	Difference to Balance	*Balance AFTER* posting**
Overhead Expenses	€10000	debit €400	⬆️	€10400
Accruals	€5500	credit €400	⬆️	€5900

ℹ️ Overhead Expenses account: an operating expense account.

ℹ️ Accruals account: a current liability account used for costs that have been incurred but not yet paid.

Purchase Invoice Example

Let's say you got a €250 invoice from Supplier A (VAT incl.) for purchasing stationery. You need to record it in the Purchase Ledger and see how this impacts your Nominal Ledger both before and after you pay it.

Four accounts are involved in the whole process:

Accounts Payable (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 Ledger:

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

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 changes 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 owed to your suppliers. If you click on the balance, a window will open.

☝️ Here, you can see the transactions list forming 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.

Related Articles

Creating and Posting Journals in Indigo Business
Creating an Account in Indigo Business

Reversing and Reposting a Journal

Understanding Journals and Ledgers in Accounting

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