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:
· Reserves and surplus
· Other long-term liabilities
· Short term borrowings
· Trade payables
· Other current liabilities
Fixed tangible assets
· Land and building
· Plant and machinery
· Furniture and fixtures
· Short term investments
· Trade receivables
· Cash and cash equivalents
· Short term loans and advances
· Other current assets
· Other income
· Material consumed
· Manufacturing expenses
· Administrative expenses
· 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. 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:
CL001 ABC LTD
CL002 XYZ LTD
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:
SJ Sales Journals
HQ Head Quarters