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Chapter 4
CODING SYSTEMS
Introduction
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) wasn’t 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 computerized accounting systems because the computer cannot understand that, say, rent is an expense, but doesn’t 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
CODING SYSTEMS
Introduction
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) wasn’t 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 computerized accounting systems because the computer cannot understand that, say, rent is an expense, but doesn’t 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