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Simple Codes

Types Of Codes

Types of Coding Systems and their Structure
Earlier we briefly discussed and illustrated some coding systems and how they are used in setting up a chart of accounts. In this section we'll continue to explore the different types of Coding Systems and how they relate to accounting and the chart of accounts.
(a) Sequential
Consecutive numbers are assigned to uniquely identify something. As related to accounting, this something is normally documents. The consecutive numbers are assigned to documents such as checks, invoices, purchase orders, receiving reports, customer payments, etc. in order to control and identify specific documents.
Pre printed forms such as checks or customer invoices with the numbers 0001 thru 9999 assigned are examples of using a sequential coding system.

(b) Blocks or Groups
Block codes use characters (numbers and/or letters) to assign or organize something into special unique groups or categories. The block is actually a range (block) of characters that uniquely identify something. Block codes usually have a fixed length.

As I stated earlier, Block Codes using number ranges, is probably the most frequent coding method used when setting up a manual or computerized charts of accounts.

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.

Let's continue our discussion utilizing our earlier example of a block numbering system. If you recall, the example looked like the following:

Example of a Simple Account Numbering System Using Block Coding with Numbers
Eight Blocks of Numbers have been used to assign account groups based on the types of accounts in the following example.
Block AssignedType Of Account
300-399Owner's Equity
500-599Cost Of Goods Sold
700-799Other Revenue
800-899Other Expenses
One limitation of our earlier account codes presented above is that you're limited to 100 accounts of each type. How could I easily provide for 1000 accounts of each group or type ? By simply making the account number 4 digits (numbers) in length instead of 3 digits (numbers) as illustrated below.

Our new account structure using 4 digits (numbers):
Block AssignedType Of Account
3000-3999Owner's Equity
5000-5999Cost Of Goods Sold
7000-7999Other Revenue
8000-8999Other Expenses
Looking at our sample table above what does it tell us ?

  • The blocks or ranges identify the different major types of accounts -assets, liabilities, owner's equity, revenue, and costs/expenses.
    • The first block of numbers 1000-1999 is a range of numbers used to create and identify the different types of asset accounts.
    • The second block of numbers 2000-2999 is a range of numbers used to create and identify the different types of liability accounts.
    • The third block of numbers 3000-3999 is a range of numbers used to create and identify the different types of owner's equity accounts.
    • The fourth block of numbers 4000-4999 is a range of numbers used to create and identify the different types of revenue accounts.
    • The fifth block of numbers 5000-5999 is a range of numbers used to create and identify the different types of cost of goods sold accounts.
    • The sixth block of numbers 6000-6999 is a range of numbers used to create and identify the different types of expense accounts.
    • The seventh block of numbers 7000-7999 is a range of numbers used to create and identify the different types of other revenue accounts.
    • The eighth block of numbers 8000-8999 is a range of numbers used to create and identify the different types of other expense accounts.

  • Our blocks have a fixed length of four ( 4 digits ).
    By choosing this coding structure we can only set up 1000 accounts for each block. Using our Asset Block as an example, it is possible to set up a maximum of 1,000 different asset accounts using the numbers 1000-1999. While this is probably more than adequate for small and medium size businesses a big business could possibly outgrow this coding system.

Of course, you could also add sub blocks and extend the number of accounts that could be set up.

  • If you know the first digit of an account, you can tell what type of an account it is. If the first digit is a 1, the account is an asset, if its a 2, the account is a liability, and so on.

  • We are limited to where we can insert a new account by the numbers (codes) already used. If you used Account Number 1000 as Cash In Bank but later would like to add A Cash On Hand Account and have it listed ahead of Cash In Bank in your chart of accounts you can't without revising your structure. If you've already been recording transactions, reorganizing your chart of accounts is not an easy task.

Let's assign some account numbers using our new 4 digit (numbers) code structure like we did earlier with our 3 digit (numbers) structure:

  • The account Cash which is an asset account would be assigned a number using the block 1000 - 1999.
   1000 - Cash
  • The account Accounts Payable which is a liability account would be assigned a number using the block 2000 - 2999.
   2000 - Accounts Payable
  • The account Sales which is a revenue account would be assigned a number using the block 4000 -4999.
   4000 - Retail Sales

We would continue this process for all the individual accounts that are needed or required for recording and reporting your business transactions.

Your final chart of accounts might resemble the following simple chart of accounts:

Simple Chart Of Accounts
Liabilities (2000-2999)
2000-Accounts Payable
2001-Notes Payable
2005-Sales Taxes-Payable
2006-FICA Taxes-Payable
2007-Federal Withholding Taxes
2008-State Withholding Taxes
2009-Unemployment Taxes
2200-Long-Term Debt
2205-Miscellaneous Accruals

Capital Accounts (3000-3999)
3000-Owner's Capital Account
3001-Owner's Withdrawals

Assets (1000-1999)
1000-Cash in Banks
1001-Petty Cash Fund
1002-Accounts Receivable
1005-Materials and Supplies
1007-Prepaid Expenses
1202-Accumulated Depreciation -- Buildings
1203-Tools and Equipment
1204-Accumulated Depreciation -- Tools and Equipment
1206-Accumulated Depreciation -- Vehicles
1207-Furniture and Fixtures
1208-Accumulated Depreciation -- Furniture and Fixtures
1300-Organization Expenses
Expenses (6000-6999)
6000-Salaries and Wages
6001-Contract Labor
6002-Payroll Taxes
6006-Office Supplies
6008-Maintenance Expense
6102-Travel Expense
6105-Dues and Contributions

Other Revenue (7000-7999)
7000-Miscellaneous Income

Other Expenses (8000-8999)
8000-Miscellaneous Expenses
Sales (Revenue) Accounts (4000-4999)
4000-Retail Sales
4001-Wholesale Sales

Cost Of Sales (5000-5999)
5000-Cost Of Goods Sold
I'm not going to leave you hanging. I earlier mentioned sub-blocks and that they could be used to increase the number of accounts, but didn't illustrate or discuss them. One "flaw" in our chart of accounts is that if we have more than one bank account, we should set up an account for each one of them. How would we go about this ? In order to accomplish this we're going to use a sub-block to identify each of the accounts. Our sub-block for identifying locations is a 2 digit (number) and is represented by the range 00-99. Let's use our Cash Account to illustrate what our account structure now looks like.

Old Structure:
Cash Account
1000 - Cash In Banks

New Structure with a Sub-block Added:
Cash Account
1000-00 Cash In Banks Bank Account #1
1000-01 Cash In Banks Bank Account #2
1000-02 Cash In Banks Bank Account #3

Notice that our account structure can still accommodate ninety seven (97) additional bank accounts with the unused digits (codes) 03-99.

We can attach this sub-block range to each of our original accounts if we need to further identify our accounts. With our old structure we could accommodate a maximum of 8000 accounts (1000 - 8999). By adding our sub-block we can now accommodate 800,000 accounts. How did I arrive at this number ? Well, each account has now be expanded to 10 accounts. If I multiply correctly, 8000 X 100 = 800,000.

What's Next ?

Hierarchial Codes
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