Hierarchial Codes

Types Of Codes

Hierarchial Codes

Structure that resembles an upside down tree structure. Information is classified and grouped into successive levels or layers. I say upside down tree because the root of the tree begins at the top and the tree branches go downward while a normal tree structure has it root at the bottom and the branches go upward. Some examples of this type of structure are a company's organization chart and an ancestry chart. The structure depends on defining parent and child relationships.

Using this type of coding system for developing a chart of accounts allows summary, subtotals, and detailed information to be reported.

If you recall, we stated earlier that block coding often uses sub-blocks to further identify accounts. A Sub-Block is a grouping or range within a block or within another sub-block that identify subsets of data. Here, we're going to use block coding with sub-blocks to build our hierarchical chart of accounts.

As they say, seeing is believing , so let's use an example to illustrate. To define our sample hierarchical account structure we're going to use 14 digits (x-xx-xxx-xxxx-xxxx).

The digits are grouped and are used to identify the following:

Digits	Group or Category	Maximum Number of Groups	Sub-Block Assigned	Summary or Detail Account
1st	1	10	0-9	Summary Account
2nd & 3rd	2	100 for each Group Defined in Category 1	00-99	Summary Account
4th,5th, & 6th	3	1000 for each Group Defined in Category 2	000-999	Summary Account
7th,8th,9th, & 10th	4	10000 for each Group Defined in Category 3	0000-9999	Summary Account
11th, 12th, 13th, & 14th	5	10000 for each Group Defined in Category 4	0000-9999	Detail Account

Our example will use the first digit of each account number to indicate the major type of accounts and whether the account is a balance sheet or income statement account. Account numbers beginning with a 1, 2 or 3 will be part of the Balance Sheet. Accounts beginning with a 4 or 5 will be part of the Income Statement or Profit and Loss Statement.

Balance Sheet
1 - Assets
2 - Liabilities
3 - Owner's Equity

Income Statement
4 - Revenue
5 - Expenses

Let's use a chart to get an idea of how our Hierarchical Coding structure might look.

1-Assets
	00
		000
			0000
				0001
				0002
			1000
				0001
				0002
			2000
				0001
				0002

2-Liabilities
	00
		000
			0000
				0001
				0002
			1000
				0001
				0002
			2000
				0001
				0002

3-Owner's Equity
	00
		000
			0000
				0001
				0002
			1000
				0001
				0002
			2000
				0001
				0002

4-Revenue
	00
		000
			0000
				0001
				0002
			1000
				0001
				0002
			2000
				0001
				0002

5-Expenses
	00
		000
			0000
				0001
				0002
			1000
				0001
				0002
			2000
				0001
				0002

Using this coding structure let's begin building our Chart Of Accounts starting with our Assets.

1 Assets - Category 1 Code - 1
Summary Account
Account Balance is the sum of all the Asset Account Balances
Parent of all the Asset Accounts

1-00 Current Assets - Category 2 Code - 00
Summary Account
Account Balance is the sum of all the Current Asset Account Balances
Child of Assets
Parent of all the Current Asset Accounts

1-00-000 Cash - Category 3 Code - 000
Summary Account
Account Balance is the sum of all the Cash Account Balances
Child of Current Assets
Parent of all the Cash Accounts

1-00-000-0000 Cash - Petty Cash - Category 4 Code - 0000
Summary Account
Account Balance is the sum of all the Petty Cash Account Balances
Child of Cash
Parent of all the Petty Cash Accounts

Sub-Accounts
1-00-000-0000-0001 Cash - Petty Cash -Fund #1 - Category 5 Code - 0001
Detail Account
Child of Petty Cash

1-00-000-0000-0002 Cash - Petty Cash -Fund #2 - Category 5 Code - 0002
Detail Account
Child of Petty Cash

1-00-000-1000 Cash - Register / Drawer - Category 4 Code - 1000
Summary Account
Account Balance is the sum of all the Cash - Register / Drawer Account Balances
Child of Cash
Parent of all the Cash - Register / Drawer Accounts

Sub-Accounts
1-00-000-1000-0001 Cash - Register / Drawer - Register Drawer #1 - Category 5 Code - 0001
Detail Account
Child of Cash - Register / Drawer Account

1-00-000-1000-0002 Cash - Register / Drawer - Register Drawer #2 - Category 5 Code - 0002
Detail Account
Child of Cash - Register / Drawer Account

1-00-000-2000 Cash - Bank - Category 4 Code - 20000
Summary Account
Account Balance is the sum of all the Cash - Bank Account Balances
Child of Cash
Parent of all the Cash - Bank Accounts

Sub-Accounts
1-00-000-2000-0001 Cash - Bank - Bank Account #1 - Category 5 Code - 0001
Detail Account
Child of Cash - Bank Account
1-00-000-2000-0002 Cash - Bank -Bank Account #2 - Category 5 Code - 0002
Detail Account
Child of Cash - Bank Account

To further illustrate our Hierarchical Chart of Accounts Structure I created the following table:

1	Assets					Category 1 Code
	00				Current	Category 2 Code
		000			Cash	Category 3 Code
			0000		Petty Cash	Category 4 Code
				0001	Fund # 1	Category 5 Code
				0002	Fund # 2	Category 5 Code
			1000		Register/Drawer	Category 4 Code
				0001	Register/Drawer # 1	Category 5 Code
				0002	Register/Drawer # 2	Category 5 Code
			2000		Bank	Category 4 Code
				0001	Bank Account # 1	Category 5 Code
				0002	Bank Account # 2	Category 5 Code
		100			Receivables	Categor 3 Code
			0000		Accounts Receivables	Category 4 Code
				0001	Customer	Category 5 Code
				0002	Other	Category 5 Code
	20				Property & Equipment	Category 2 Code
		000			Property	Category 3 Code
			0000		Land	Category 4 Code
				0001	Land Development	Category 5 Code
				0002	Land Plants	Category 5 Code
		500			Equipment	Category 3 Code

What does our table illustrate ?

The table (chart) is structured hierarchically, with all the accounts listed below and to the right of a given account title adding together to make the total of that given account.
Accounts are either Summary or Detail accounts.
- Summary Accounts sum the balances of other accounts.
- Detail Accounts are the accounts actually charged.
All parent accounts are summary accounts.
Some accounts are both a parent and a child.
Sub block ranges can be the same as long as they are used with different account categories.
The full 14- digits define the detail accounts. The detail accounts are the accounts that actually receive the entries (charges).
The hierarchical structure is more adaptable to a computer than a manual system. Why ? With a manual system when we posted to a detail account we would also have to total and calculate all the balances for the summary accounts. In other words, we would be totalling each category or sublevel and maintaining the balance of the summary accounts. You can definitely count me out of this! Using a computer with the appropriate software, the summaries would automatically be calculated and maintained.

Going A Little Further

What if my business has several Locations and needs to easily determine the total assets for each of the different Locations ? What if my business has several Departments and needs to easily determine the total assets assigned to each Department ?

Unfortunately, the structure of the above chart does not provide us with this type of information. Could we fix it ? You betcha we can. How ? By expanding our coding system and adding additional account identifiers.

First, we'll add a Location Account Identifier.
1-00-000-0000-0001-01 Cash - Petty Cash -Fund #1 - Location # 1
1-00-000-0000-0002-01 Cash - Petty Cash -Fund #2 - Location # 1

Nest we'll add a Department Account Identifier
1-00-000-0000-0001-01-001 Cash - Petty Cash - Fund #1 - Location # 1 - Department # 1
1-00-000-0000-0002-01-001 Cash - Petty Cash - Fund #2 - Location # 1 - Department # 1

Now we have the capability of obtaining the information we want.

What's Next ?

Mnemonic Codes