Codes Use

How Codes Are Used in Conjunction with Building The Chart Of Accounts ?

As coding applies to bookkeeping and accounting we just mean that we assign a name, number (or both), description, and group or category identifiers to each unique account.

What is used to identify what groups or categories an account belongs to and define an account ? The account numbering system itself or assigning groups or category identifiers. What groups or categories are the accounts assigned to using account numbering (blocks of numbers) and/or account identifiers ? As a minimum, the Chart of Accounts is customarily assigned to and arranged in the group / category that we discussed earlier. This group, known as the Type Of Account, is comprised of Assets, Liabilities, Owners' Equity, Revenue, and Expense accounts.

Account Numbering System

A simple or elaborate numbering system composed of numbers, alphabetic characters, or a combination of both (alphanumeric) is often used in setting up a chart accounts. Digits in the account number are used to indicate the type of account, a location of the company, a division of the company, a department of the company, etc. The account number could end up to be quite lengthy and composed of many digits representing the type of account, location, division, department, etc. In other words we define accounts using ranges (blocks) of numbers. These number ranges (blocks) are used to define major account categories and sub-categories by assigning these numbers to each account that belongs to a unique group or category range.

Block codes used with numbers is one of the most frequent coding methods used when setting up a manual or computerized charts of accounts. Let's take a look at a simple example to help clarify what we're talking about.

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

By separating each account number by several numbers, room is provided for adding additional new accounts. Each of our blocks allow a maximum of 100 accounts.

The first digit (number) represents the type of account (asset, liability, etc.). If the first digit (number) is a 1, this account is an asset. If the first digit (number) is a 2, it is a liability and so on.

The block assigned for the type of account is used to assign account numbers to the individual accounts.

Examples Using the 3 digit numbers code structure:

The account Cash which is an asset account would be assigned a number using the block 100-199.
100 - Cash
The account Accounts Payable which is a liability account would be assigned a number using the block 200-299.
200 - Accounts Payable
The account Sales which is a revenue account would be assigned a number using the block 400-499.
400 - Retail Sales

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

Account Identifiers or Attributes

Using Account Identifiers or Attributes is another method of coding that may be used for developing your chart of accounts. Account Identifiers or Attributes are unique building blocks or pieces of information used to design and set up the chart of accounts. Each block or piece attaches additional identifying information to the account. Accounts are defined by assigning identifiers such as a division code, department code, type of account code (asset, liability, equity, revenue, expense), account group code (current asset, current liability, etc.) sequence code (order the account appears in financial reports), etc. that are used to group and report on different segments or activities of the business and provide information for formatting reports.

Assigning Attributes To Accounts
Let's take a look at a couple of possible account structures assigning the attribute department to our accounts.

For our illustration, we're going to use the following accounts:

5010 Wages
5015 Fringe Benefits
5020 Materials & Supplies

For our department (attribute) we're going to use the following three manufacturing departments:

01 - Machining Department
02 - Assembly Department
03 - Inspection Department

Instead of building just one account structure, we're going to illustrate two possibilities.

Our Two Possible Account Structures

Structure 1

Account	Account Name	Department Number	Department Name
5010	Wages	-01	Machining Department
		-02	Assembly Department
		-03	Inspection Department
5015	Fringe Benefits	-01	Machining Department
		-02	Assembly Department
		-03	Inspection Department
5020	Materials & Supplies	-01	Machining Department
		-02	Assembly Department
		-03	Inspection Department

Structure 2

Department Number	Department Name	Account Number	Account Name
01	Machining Department	-5010	Wages
		-5015	Fringe Benefits
		-5020	Materials & Supplies
02	Assembly Department	-5010	Wages
		-5015	Fringe Benefits
		-5020	Materials & Supplies
03	Inspection Department	-5010	Wages
		-5015	Fringe Benefits
		-5020	Materials & Supplies

Both structures present a parent and child relationship and a summary and detail relationship.
Account 5010-01 is Wages for the Machining Department using Structure 1.
Account 01-5010 is Wages for the Machining Department using Structure 2.

Can you tell me what's the difference between the two account structures ?

Structure 1 uses the account portion 5010 as the parent portion of the complete account and the 01 (department) as the child. Structure 1 provides us with a summary of all our expenditures by account expense identifier such as wages, fringe benefits, etc. by summing the amounts charged to each department.

Structure 2 is set up using the 01 (department) as the parent portion of the complete account and the 5010 as the child. Structure 2 provides us with a summary of the total charges for each of our departments by summing the individual charges (expense identifiers) such as wages, fringe benefits, etc. and groups all the expenses by department.

If I want to know the total that my company spends for each expense category (wages, fringe benefits, etc.) what structure would I favor ? Hopefully, you answered Structure 1.

What structure would I favor if I was mainly concerned with controlling my individual expenses by departments ? Did you say Structure 2 ? I hope so.

Can I have it both ways ? Both structures provide you with the capability to prepare a Departmental Report with all the expenses listed for each department or to prepare a summary report of your expenses by type such as total wages, total fringe benefits, etc. You would, however, have to perform an analysis depending on the structure that you chose.

What do I mean ?
Assuming we chose Structure 1 that groups the accounts by expenses type how would I prepare a departmental report ?

How about if we made a worksheet that listed each expense category vertically down our page and listed our departments horizontally across our page ? Would this do the trick ?

Expense	Departments
	Total	Department 1	Department 2	Department3
Wages	xxxx	xxxx	xxxx	xxxx
Fringe Benefits	xxxx	xxxx	xxxx	xxxx
Materials & Supplies	xxxx	xxxx	xxxx	xxxx

If we had chosen Structure 2, we could prepare a similar table that would summarize our expense categories.

Note:Report Generators are provided with good accounting software programs that would allow us to prepare reports such as the above automatically instead of having to perform a manual analysis of our financial information.

Just to see if you're on your toes. What if I wanted to include budgeted amounts in my account structure. Can we accomplish this ? We could accomplish this by assigning an additional attribute to our chart of accounts that identified an account as a budget account or an actual account. Let's use an A to identify our actual accounts and a B to identify our budgeted accounts.

A sample of our new chart of accounts
5010-01-A Actual Wages Department 1
5010-01-B Budgeted Wages Department 1
5010-02-A Actual Wages Department 2
5010-02-B Budgeted Wages Department 2
5010-03-A Actual Wages Department 3
5010-03-B Budgeted Wages Department 3

Hopefully, you now see that assigning attributes and identifiers provides us with an excellent method for identifying financial information when used to prepare a chart of accounts.

What's Next ?

Codes Use Video