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 Assigned	Type Of Account
100-199	Assets
200-299	Liabilities
300-399	Owner's Equity
400-499	Revenues
500-599	Cost Of Goods Sold
600-699	Expenses
700-799	Other Revenue
800-899	Other 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 Assigned	Type Of Account
1000-1999	Assets
2000-2999	Liabilities
3000-3999	Owner's Equity
4000-4999	Revenues
5000-5999	Cost Of Goods Sold
6000-6999	Expenses
7000-7999	Other Revenue
8000-8999	Other 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

1003-Inventory

1005-Materials and Supplies

1007-Prepaid Expenses

1008-Deposits

1200-Land

1201-Buildings

1202-Accumulated Depreciation -- Buildings

1203-Tools and Equipment

1204-Accumulated Depreciation -- Tools and Equipment

1205-Vehicles

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
6003-Utilities
6004-Telephone
6005-Rent
6006-Office Supplies
6007-Postage
6008-Maintenance Expense
6009-Insurance
6100-Interest
6101-Depreciation
6103-Entertainment
6102-Travel Expense
6104-Advertising
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

4002-Sales-Service

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