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This chapter is concerned with the part of the AIS that ties all of the transaction processing

systems together and handles financial reportingthe general ledger.


The first topic discussed is the role of coding schemes. This is probably new to you. Then
the general ledger system is presented, followed by the financial reporting system.
Historically, the accounting system was the first, and for a very long time, the only,
information system in most organizations. The last part of this chapter discusses a much broader
information systemthe management reporting system (MRS) which provides both financial and
non-financial information to aid managers to plan and control business activity. Of particular note
is the fact that an MRS is discretionaryat least in the sense of not being mandated by any
authoritative body. It would be hard to argue, however, that an organization is free to choose not
to collect and report information that helps the organization meet its goals and objectives.

The first part of the chapter discusses a topic which has relevance for all of the transaction
cycles. In previous chapters, we saw how primary and secondary keys link together transaction
and master records for file updating. In order to emphasize the importance of data coding
schemes, we first consider a system that does not use them.

A System without Codes


This section is designed to highlight the extra record keeping required and the potential for
errors in a system without codes.
Firms process large volumes of transactions that are similar in their basic attributes.

A System with Codes


The same system, with a simple coding scheme in place, is illustrated. Note the discussion
of the benefits of coding.

Numeric and Alphabetic Coding Schemes


Various types of codes exist. None is perfect. What is chosen for a given system must work
in its environment. This includes compatibility with procedures and as much information content
in the coding scheme as is practical.

Coding systems
In a sequence coding system, the records are simply numbered in sequence. Sales invoices,
purchase orders, and checks are examples of business documents where sequence
codes are employed. An advantage of sequence codes is that missing documents can be
quickly identified, either manually or by the computer system. However, in a sequence coding
system it is not possible to indicate categories of the item being coded. Thus, a sequence code

for sales invoices will not be able to distinguish between say East region invoices and
West region invoices.
In a block coding system, a classic example of the block coding system is the chart of accounts.
A chart of accounts coding system might look like this: numbers 100 through199 for
assets, 200 through 299 for liabilities, 300 through 399 for income accounts, and 400
through 499 for expense accounts. If there are only 30 asset accounts, then the
numbers 131 through 199 are simply unused and available for additional asset
accounts to be set up in the future. The advantage of the block coding system is that the
type of account can be discerned simply by knowing the account number. For example, the
user would know that account numbers beginning with 4 are expense accounts. The
drawback of block codes is that they can reveal only very limited aspects of the item being
coded. In the chart of accounts example described above, the code could be further
refined such that accounts numbered 100 through 149 are current assets, and
accounts numbered 150 through 199 are long term assets. Each account number
would then reveal not just the broad account type (i.e., asset, liability, income,
expense) but also the specific type of account in each broad category (i.e., current
asset, long term asset). However, it is difficult to conceive of a block code being used
to represent three or more aspects of the item being coded.
In a group coding system, each digit or group of digits in the code for an item signifies a different
aspect of that item. Consider the following coding system for parts: digits 1-2 indicate
the division number (assuming that there are no more than 99 divisions), digit 3
indicates the warehouse number in the division (assuming a maximum of 10
warehouses in each division), digits 4 and 5 indicate the part type (assuming that
there are no more than 99 part types), and digits 6 through 8 indicate the specific
part number (assuming no more than 999 parts within each part type). So a part
number of 16359217 indicates that it belongs to division number 16, is stored in
warehouse number 3 in that division, is of part type 59, and that it is part number 217
in that warehouse. Group codes can be very flexible since there is no theoretical limit on
the length of the code and the number of dimensions that it can be used to capture.
However, practically speaking the group code should be of reasonable length so that it is not
burdensome for users.
Some guidelines for designing coding schemes are as follows:

Use numbers rather than letters whenever possible (numeric codes are easier to enter into
a computer system)
Allow for future expansion
Make the code as simple as possible