What Is Coding in Accounting Terms?

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Coding in accounting is the process of assigning numbers or letters to data to create a fast-search database. Accounting codes are not universal as every accountant, accounting firm, institution or business may create its own coding system in accounting tailored to its own organizational needs. Some types of coding are simple and straight forward, while others require a manual to interpret.

Mnemonic Coding

  • Mnemonic coding in accounting uses abbreviated letters that stand for a full word. For example, “ACCT” could stand for “account,” “DT” for “date” or “GTL” for “grand total.”

Sequential Coding

  • Also called serial coding, sequential coding in accounting uses numbers that have a consecutive order. In a bookkeeping ledger, a sequential code may run down the side of the page with one on every new line. An example of a sequential code is 00, 01, 02, 03 and so on.

Hierarchical Coding

  • Similar to a library’s Dewey Decimal Classification system, hierarchical codes are those that an accountant could infinitely expand upon, if needed, in a manner that is structured and logical. For example, if an accountant wanted to create a main section in her accounting system, she would designate a number with each section like “808 Assets” and “809 Liabilities.” Then, if she wanted to create sub-sections, she would do so with the use of a decimal, like “808.01 Financial Assets.” The accountant could continue to add sub-sections to each sub-section as needed, such as “808.01.001 Financial Assets for 2001-2002.”

Block Coding

  • In accounting, block coding refers to numbers an individual may assign to general accounting terms while bookkeeping. For example, if a block code reads, “5,000: Fixed Assets, 6,000: Stocks,” the 5,000 block is exclusively for anything dealing with fixed assets. Because these code blocks are 1,000 numbers apart, an individual could add up to 1,000 sub-block codes or sub-categories.

Faceted Coding

  • A faceted code in accounting is a series of grouped numbers that represent different headings an accountant may use. If an accountant is keeping the books for a retail location, for example, she may state that Facet 1, or group 1, represents the different departments within the store; Facet 2 represents the different types of costs the store could incur; and Facet 3 contains subcategories of Facet 2.

    Within each facet is a sequential code that represents a different item. In the example, Facet 1 may have the following fields: 00 Online Sales, 01 In-Store Sales and 02 Returns. Facet 2 could include the following fields: 00 Marketing Costs, 01 Office Supplies and 02 Labor Expenses. Then, Facet 3 could contain a series of block codes where the numbers 0000 to 01000 represent overhead costs, where the number 0050 represents the cost to purchase an Internet domain. Therefore, if the accountant used a faceted code, the series of numbers that would represent the cost to promote the store online with a new website would read “00 00 0050.” Each section of this code represents each individual facet: 00 (Online Sales) 00 (Marketing Costs) 0050 (Cost of Internet Domain).

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