How are transactions input into a computerised system?
Every account must be separately identifiable. One method of identification is to give each ledger account its own unique name or title. However, it is often quicker and more convenient to also give each ledger account its own unique code number.
A code number is usually quicker to write than an account name, so using code numbers can save time.
Using unique code numbers can reduce the risk of errors, where several different accounts have similar names so that there is a risk that a transaction is recorded in the wrong account.
In computerised accounting, it is easier for a computer to process code numbers than account names.
Account codes can be designed to have some significance. For example, a business may have account codes consisting of four digits. If so, it may allocate the code number 1000 to the owner's capital account, give all asset accounts a code beginning with the number 2. all liabilities a code beginning with a 3, all income accounts a code beginning with 4 and all expense accounts a code beginning with 5. In this way, it is possible to tell immediately from the code whether the account is a capital, asset, liability, income or expense account.
It is usual to record the account codes on source documents before recording the transactions in the accounts. It is important to identify and apply the correct codes to avoid errors in the recording of transactions and financial information.
Inputting transactions into the accounting system is normally organised using a system of codes. In most accounting systems all the general ledger accounts, suppliers, customers, inventory items and documents such as cheques and invoices are referenced using codes. This makes it easier to ensure that data input is allocated to the correct account and enables the business to conduct additional analysis of data in order to extract useful management information.
In a sequential system, codes are allocated to items in strict numerical order. This means that there is no obvious connection between a code and what it represents.
For instance in the following system you can have no idea what code 62 would represent.
A faceted code is one that is broken down into a number of facets or fields, each of which signifies a unit of information. For instance:
A can of Heinz baked beans would therefore have a code of 3201.
Mnemonic codes are usually in alphanumeric form and incorporate some descriptive element that makes it easy to identify the correct code. For example, a customer named "Robertson" might have a code beginning ROB, e.g. ROB052. A similar concept can be used where items can be distinguished by some kind of measurement.
Significant digit codes incorporate digits that are part of the description of the item. For example:
Block/hierarchical codes commonly form the basis of general ledger coding systems, for instance:
The first 'block' is allocated to only non-current assets. This means that it is possible to have up to 1,000 different non-current asset ledger accounts.
A hierarchical code structure is a type of faceted code whereby each digit represents a classification, and each digit further to the right represents a smaller subset than those to the left. This makes it even easier to find items in a list of codes because related accounts are grouped together.
For instance within the 0000-0999 non-current assets block, the range 0300 to 0399 may be office furniture asset accounts and 0400 to 0499 may be motor car asset accounts.
When an accounting system is coded using the block/hierarchical method it is called a chart of accounts. An extract from the default chart of accounts in the widely-used Sage bookkeeping package is as follows:
| Code range | Category | Sub-category |
|---|---|---|
| Non-current assets | Property | 0010 to 0019 |
| Plant and Machinery | 0020 to 0029 | |
| Office Equipment | 0030 to 0039 | |
| Furniture and Fixtures | 0040 to 0049 | |
| Motor Vehicles | 0050 to 0059 | |
| Current assets | Inventory | 1000 to 1099 |
| Receivables | 1100 to 1199 | |
| Bank Account | 1200 to 1209 | |
| Deposits and Cash | 1210 to 1239 | |
| Credit Card (payables) | 1240 to 1240 | |
| Credit Card (receivables) | 1250 to 1250 |
Within each of these sub-divisions there are a number of further default accounts. For instance the Professional Fees account codes range 7600 to 7699 has the following accounts already set up:
An efficient and effective coding system, whether manual or computerised, should incorporate the following features: