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

Simple to use

Understandable

Concise

Precise

Expandable

There are several methods of coding. Codes should be:

As we will see, these requirements can be in conflict.

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

It is simple and concise, but as constructed might have some faults:

1 There is no relationship at all between the code and the item/person being encoded .
2 Expansion might be difficult once you have over 9999 customer if documents and computer files can
hold only four digits. Additionally, if someone called Affleck becomes a customer, he will have to be tagged
onto the end of the sequence ie not reflecting alphabetical order. To avoid this problem, often sequence
codes proceed as 0010, 0020, 0030etc so that gaps are built in for future use.
Hierarchical (or significant digit) codes
Here, are you progress through the code, information become increasingly specific. Many libraries use this
system to code their books using the Dewey Decimal System

In a business, hierarchical codes could be used to code the accounts in the general ledger. For example a
code such as 3112 could be interpreted as the Machinery Cost Account, using the following system.

The great advantage of this type of code is that its structure provides information both to human users and
to computers. For example, it would be easy to program the compute to work out the total cost of all fixed
assets: simply add up all accounts starting 311.
Block codes
These lie somewhere between simple sequence codes and the full, detailed hierarchical code. They start
off giving some information but then lose enthusiasm. So for general ledger codes you might have

Faceted codes
These are an improvement of block codes and provide more information but lack a logical hierarchical
structure. The code is broken down into sections or groups of digits and each group codes for a particular
attribute.
For example and employee code could be:

Mnemonic
All the codes illustrated do far have been purely numerical. Mnemonic codes contain letters to help
humans to learn what the codes mean. The hierarchical code above:

could then become

It is not common to have full mnemonic codes and often just the first character will be mnemonic and the
rest will follow another system.
Identifying and correcting errors in coding of revenue and expenses

Identifying errors in sequence codes is almost impossible because there is no logical connection between
the code and the object or person that can be used to spot an error. The only type of error that can really
be identified is if the format of the code is wrong. For example, 4 or 6 digits are used when only 5 are
expected.
Once the coding system has more structure then identifying errors is much easier.