Introduction to Coding Systems

This chapter looks at how coding systems

can be devised and used in accounting
systems.
What are the two purposes of a code?
1. It provides a brief identification.
2. It gives meaning to data in subsequent
processing.
Design Considerations in Coding
---Codes should serve some useful purpose
---Codes should be consistent
---Codes should be standardized
throughout the organization
---Codes should plan for future expansion
Major account classification Asset
Financial statement classification Cash
Financial statement classification Checking
account bank

AISs depend on coding to record, store,

classify and retrieve financial data.

Computer systems most often use

numeric codes or alphanumeric codes for
processing accounting transactions.

Purposes of coding:

uniquely identifies transactions and accounts

compresses data
aids in classification process
conveys special meanings
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) wasnt
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 computerised accounting systems
because the computer cannot understand
that, say, rent is an expense, but doesnt
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
should be:

Simple to use, Precise

Understandable

Concise

Sequential codes
With sequence codes, items (such as
checks or invoices) are numbered
consecutively to ensure no gaps in the
sequence. The numbering helps ensure
that:
--All items are
accounted for.
-----There
are no duplicated numbers, which
would suggest errors or fraud.
In this method products or customer are
simply allocated numbers in sequence:

numbers. The following guidelines

should be observed:

It is simple and concise, but as

constructed might have some faults:
1. There is no relationship at all between the
code and the item/person being encoded .
2. Expansion might be difficult once you
have over 9999 customer if documents and
computer files can hold only four digits.

The code should be consistent with its

intended use, so make sure you know
what users need.

Provide enough digits to allow room for

growth.

Keep it simple in order to:

Minimize costs

Block codes

Facilitate memorization

When block codes are used, blocks of

numbers within a numerical sequence are
reserved for a particular category.

Ensure employee acceptance

--EXAMPLE: The first three digits of a Social

Security number make up a block code that
indicates the state in which the Social
Security number was issued:

Make sure its consistent with:

The companys organization

structure

Other divisions of the

organization

Mnemonic
All the codes illustrated do far have been
purely numerical. Mnemonic codes contain
letters to help humans to learn what the
codes mean. The hierarchical code above:

When group codes are used, two or

more subgroups of digits are used to
code an item.

EXAMPLE: The code in the upper,

right-hand corner of many checks is a
group code organized as follows:

Digits 12
number

Bank

Digit 3
Reserve District

Federal

Digits 47
Branch
office of Federal Reserve

Digits 89

Stat

Group coding schemes are often used

in assigning general ledger account

could then become

It is not common to have full mnemonic

codes and often just the first character will
be mnemonic and the rest will follow another
system.
Once the coding system has more
structure then identifying errors is
much easier.

The audit trail for the sale of inventory

would link the customer order, sales order,
and shipping document to the sales invoice.
These documents would also be linked to the
journal entry recording the sale of that
merchandise. The invoice would also be
linked to the cash received from the
customer and to the journal entry to record
that receipt.
-----The inclusion of posting references
and document numbers enable the
tracing of transactions through the
journals and ledgers and therefore
facilitate the audit trail
An audit trail exists when there is
sufficient documentation to allow
the tracing of a transaction from
beginning to end or from the end
back to the beginning.
Data flow diagramming is a highly
effective technique for showing the flow of
information through a system. DFDs are
used in the preliminary stages of systems
analysis to help understand the current
system and to represent a required system.
The DFDs themselves represent external
entities sending and receiving information
(entities), the processes that change
information (processes), the information
flows themselves (data flows), and where
information is stored (data stores).

How important is the data on your

systems? The importance of data can go
a long way in helping you determine if
you need to back it upas well as when
and how it should be backed up. For
critical data, such as a database, you'll
want to have redundant backup sets that
extend back for several backup periods.
For less important data, such as daily
user files, you won't need such an
elaborate backup plan, but you'll need to
back up the data regularly and ensure
that the data can be recovered easily.

What type of information does the

data contain? Data that doesn't seem
important to you may be very important
to someone else. Thus, the type of
information the data contains can help
you determine if you need to back up the
dataas well as when and how the data
should be backed up.

How often does the data change? The

frequency of change can affect your
decision on how often the data should be
backed up. For example, data that
changes daily should be backed up daily.

How quickly do you need to recover

the data? Time is an important factor in
creating a backup plan.

Do you have the equipment to

perform backups? You must have
backup hardware to perform backups. To
perform timely backups, you may need
several backup devices and several sets
of backup media. Backup hardware
includes tape drives, optical drives, and
removable disk drives. Generally, tape
drives are less expensive but slower than
other types of drives.

Who will be responsible for the

backup and recovery plan? Ideally,
someone should be a primary contact for
the organization's backup and recovery
plan. This person may also be responsible
for performing the actual backup and
recovery of data.

In a batch processing system,

transactions are accumulated over a period
of time and processed as a single unit, or
batch. For example, a store may update its
sales records every day after the store
closes. Or a payroll system may process all
the time cards every two weeks to determine
employee earnings and produce paychecks.
Whatever the time period in a batch system,
there is some time delay between the actual
event and the processing of the transaction
to update the records of the organization.
Figuring Out a Backup Plan
It takes time to create and implement a
backup and recovery plan. You'll need to
figure out what data needs to be backed up

Backup and recovery procedures protect

your database against data loss and

reconstruct the data, should loss occur. The

reconstructing of data is achieved through
media recovery, which refers to the various
operations involved in restoring, rolling
forward, and rolling back a backup of
database files. This chapter introduces
concepts fundamental to designing a backup
and recovery strategy.

Provides finished goods to the

revenue cycle.
Provides data to the general
ledger and reporting system

BUSINESS CYCLES
The business
transaction cycle is a process that:
----Begins with capturing data about a
transaction.----Ends with an information
output, such as financial statements revenue
cycle Give goods Get cash

Every transaction cycle:

Relates to other cycles.

Interfaces with the general ledger and

reporting system, which generates
information for management and external
parties.

The Financing Cycle:

Gets funds from the revenue

cycle.

Provides funds to the

expenditure and HR/payroll
cycles.

Provides data to the general

ledger and reporting
system.

The General Ledger and Reporting

System:

Gets data from all of the

cycles.

Provides information for

internal and external users

The Revenue Cycle

Gets finished goods from the

production cycle.

Provides funds to the financing

cycle.

Provides data to the general ledger

and reporting system.

Not every module is needed in

every organization, e.g., retail
companies dont have a production
cycle

The Expenditure Cycle

Gets funds from the financing cycle.

Provides raw materials to the

production cycle.

Provides data to the general ledger

and reporting system.

Accommodate the information

needs of managers.

The Production Cycle:

Gets raw materials from the

expenditure cycle.

Integrate financial and

nonfinancial data.

Gets labor from the HR/payroll cycle.

Many accounting software packages

implement the different transaction
cycles as separate modules.

The implementation of each

transaction cycle can differ
significantly across companies.

However the cycles are implemented,

it is critical that the AIS be able to:

Accountants play an important role in

data processing. They answer
questions such as:

What data should be entered

and stored?

Who should be able to access

the data?

How should the data be

organized, updated, stored,
accessed, and retrieved?

How can scheduled and

unanticipated information needs
be met?

To answer these questions, they must

understand data processing concepts.

An important function of the AIS is to

efficiently and effectively process the
data about a companys transactions.

In manual systems, data is

entered into paper journals and
ledgers.

In computer-based systems,
the series of operations
performed on data is referred to
as the data processing cycle.

The data processing cycle consists of

four steps:

Data input

Data storage

Data processing

Information output

The general ledger is the summary

level information for all accounts.
Detail information is not kept in this
account
Suppose XYZ Co. has three
customers. Anthony Adams owes
XYZ $100. Bill Brown owes $200.
And Cory Campbell owes XYZ $300.
The balance in accounts receivable
in the general ledger will be $600,
but you will not be able to tell how
much individual customers owe by
looking at that account. The detail
isnt there.
The subsidiary ledgers contain the
detail accounts associated with the
related general ledger account. The
accounts receivable subsidiary
ledger will contain three separate
t-accountsone for Anthony
Adams, one for Bill Brown, and one
for Cory Campbell