Grouping and codification of accounts
When the volume and size of the business increase, the number of
transaction increases.Therefore, it becomes necessary to have proper classification of data.
In any organisation, the main unit of classification is the major head
which is further divided into minor heads. Each minor head may have number of
sub-heads. After classification of accounts into various groups namely, major,
minor and sub-heads and allotting codes to each account these are programmed
into the computer system.
A proper codification requires a systematic grouping of accounts. The
major groups or heads could be Assets, Liabilities, Revenues and Expenses. The
sub- groups or minor heads could be capital, non-current liabilities, current
assets, sales and so on.
In general, the basic classifications of different accounts embodied in
a transaction are resorted through accounting equation.
Assets = Liabilities + Capital +
(Revenues – Expenses)
Each component of the above equation can be divided into groups of
accounts as follows:
Capital
·
Capital
·
Reserves
and surplus
Non-Current Liabilities
·
Long-term
borrowings
·
Other
long-term liabilities
Current liabilities
·
Short
term borrowings
·
Trade
payables
·
Other
current liabilities
Fixed tangible assets
·
Land and
building
·
Plant and
machinery
·
Furniture
and fixtures
Intangible assets
·
Goodwill
·
Copyright
·
Patents
Current Assets
·
Short
term investments
·
Inventories
·
Trade
receivables
·
Cash and
cash equivalents
·
Short
term loans and advances
·
Other
current assets
C. Revenues
·
Sales
·
Other
income
D. Expenses
·
Material
consumed
·
Wages
·
Manufacturing
expenses
·
Depreciation
·
Administrative
expenses
·
Interest
·
Selling
and distribution expenses, etc.
Code is an identification mark. Generally, computerised accounting
involves codification of accounts. Codification of accounts is needed where
there are numerous accounts heads in an organisation. There is a hierarchical
relationship between the groups and its components. In order to maintain the
hierarchical relationships between a group and its sub-groups, proper
codification is required.
The coding scheme of account heads should be such that it leads to
grouping of accounts at various levels so as to generate various reports. For
example, the codes for various accounts may be allotted as follows:
i.
Liabilities
and Capital
ii.
Assets
iii.
Revenues
iv.
Expenses
i.
Capital
ii.
Non-current
liabilities
iii.
Current
liabilities
i.
Non-current
assets
ii.
Current
assets
The above codification scheme utilises the hierarchy present in grouping
of accounts. Major advantage of such coding is that if the account codes are
listed in ascending order, these will be automatically listed as per the
desired hierarchy.
Following are the three methods of codification.
In sequential code, numbers
and/or letters are assigned in consecutive order. These codes are applied
primarily to source documents such as cheques, invoices, etc. A sequential code
can facilitate document search. For example:
Code Accounts
CL001 ABC LTD
CL002 XYZ LTD
CL003 SCERT
In a block code, a range of numbers is partitioned into a desired number
of sub-ranges and each sub-range is allotted to a specific group. In most of
the cases of block codes, numbers within a sub-range follow sequential coding
scheme, i.e., the numbers increase consecutively. For example:
Code Dealer type
100 – 199 Small pumps
200 – 299 Medium pumps
300 – 399 Pipes
400 – 499 Motors
A mnemonic code consists of
alphabets or abbreviations as symbols to codify a piece of information. For
example:
Code Information
SJ Sales Journals
HQ Head Quarters
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