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Chapter: 11th Accountancy : Computerised Accounting

Grouping and codification of accounts

When the volume and size of the business increase, the number of transaction increases.

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.


 

Grouping of accounts

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:

A.  Liabilities and capital

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

 

B. Assets

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.

 

Codification of accounts

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

 

Under Liabilities and Capital

i.               Capital

 

ii.               Non-current liabilities

 

iii.               Current liabilities

Under Assets

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.

 

Methods of codification

Following are the three methods of codification.

a. Sequential codes

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

b. Block codes

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

c. Mnemonic codes

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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