Introduction to Coding Systems

This chapter looks at how coding systems can be devised and used in accounting
systems.

The use of codes in categorising and processing transactions

It is universal practice in accounting systems to use coding systems to refer to
customers, suppliers, accounts and employees. Codes are used because they are
concise and precise, and can be subject to computer checking

Concise: instead of referring to a product as a 50cm, high resolution LED

monitor, the product is given a code such as 50HRL. This is much quicker to write
or type.

Precise: there might be several makes of 50cm high resolution LED monitors and
information might be confusing and ambiguous if the manufacturer (Sony, Panasonic,
Samsung, LG etc) wasnt specified. A code number can therefore be used to ensure
that products and people are referred to uniquely eg 50HRLLG.

Checking: if all inventory codes are 7 digits long then forms and input screens can
be designed for this. Computers can check that all 7 digits are present; sometime
more sophisticated checks can be carried out on the structure off the code. This
reduces the chance of errors.

Processing: Codes can also help in processing transactions. For example if all
income-related accounts have the structure 1xxxx, all expense-related accounts have
the structure 2xxxx, all asset-related accounts 3xxxx and all liability accounts
4xxxx, then this will help the production of the income statement (all 1xxxx
amounts less all 2xxxx amounts) and the statement of financial position (3xxxx as
asset amounts and 4xxxx amounts as liabilities). This is particularly needed in
computerised accounting systems because the computer cannot understand that, say,
rent is an expense, but doesnt need this understanding so long as rent is coded,
say 21892. Because it starts with 2 it will be treated as an expense.

Different methods of coding

There are several methods of coding. Codes should be:

Simple to use
Understandable
Concise
Precise
Expandable
As we will see, these requirements can be in conflict.

Sequential codes

In this method products or customer are simply allocated numbers in sequence