Coding systems
The coding system is the means by which data is entered into the accounting
system. Each account in an accounting system has a unique code used to identify
the correct account for a posting (to be keyed into the computer if the system is
computerised). If there are two suppliers called Jim Jones, you can only tell their
accounts apart by a different code. Coding also saves time in copying out data
because codes are shorter than 'longhand' descriptions. For the same reason, and
also to save storage space, computer systems make use of coded data.
Coding purchase invoices
In purchase accounting systems, the most obvious examples of codes are as
follows.
• Supplier account numbers (to identify each individual supplier)
• Nominal ledger account numbers (which identify the accounts which record
each category of purchases, such as goods, electricity etc)
• Inventory item codes (to identify each individual inventory line)
These are all codes a business sets up and applies internally. External codes which
affect the business include bank account numbers and bank sort codes. Various
coding systems (or combinations of them) may be used when designing codes.
The systems are described below
Sequence codes
Sequence codes make no attempt to classify the item to be coded. It is simply
given the next available number in a rising sequence. New items can only be
inserted at the end of the list and therefore the codes for similar items may be
very different.
For example:
1 = saucepans
2 = kettles
3 = pianos
4 = dusters
Sequence codes are rarely used when a large number of items are involved,
except for document numbering (eg invoice numbers).
Block codes
Block codes provide a different sequence for each different group of items. For
example , suppliers may be divided up according to area.
North East code numbers 10,000-19,999
North West code numbers 20,000-29,999
Scotland code numbers 30,000-39,999
The coding of supplier accounts is then sequential within each block.
Significant digit codes
Significant digit codes use some digits which are part of the description of the
item being coded.
An example is:
5000 Electric light bulbs
5025 25 watt
5040 40 watt
5060 60 watt
5100 100 watt etc
Hierarchical codes
Hierarchical codes are allocated on the basis of a tree structure, where the
relationship between items is of utmost importance. A well known example is the
Universal Decimal Code used by most libraries.
For example:
5 Business
5 2 Finance
5 2 1 Cost accounting
5 2 1.4 Standard costing
5 2 1.4 7 Variance analysis
5 2 1.4 7 3 Fixed overhead variances
Faceted codes
Faceted codes consist of a number of sections, each section of the code
representing a different feature of the item. For example in a clothing store there
might be a code based on the following facets.
Garment type Customer type Colour Size Style type
If SU stood for suit, M for man and B for blue, a garment could be given the code
SU M B 40 17. Similarly ND F W 14 23 could stand for a woman's white nightdress
size 14, style 23. One of the great advantages of this system is that the type of
item can be recognised from the code.
Faceted codes may be entirely numeric. For example, a large international
company allocates code numbers for each suppliers' representative.
Digit 1 Continent (eg America – 1, Europe – 2)
Digits 2/3 Country (eg England – 06)
Digit 4 Area (eg North – 3)
Digits 5/6 Representative's name (eg Mr J Walker – 14)
Coding in the nominal ledger
A nominal ledger will consist of a large number of coded accounts. For example,
part of a nominal ledger might be as follows.
Account code Account name
100200 Plant and machinery (cost)
100300 Motor vehicles (cost)
300000 Total receivables
400000 Total payables
500130 Wages and salaries
500140 Rent
500150 Advertising expenses
500160 Bank charges
500170 Motor expenses
500180 Telephone expenses
600000 Sales
700000 Cash
A business will, of course, choose its own codes for its nominal ledger accounts.
The codes given in the above table are purely imaginary.
