Question

List 2 different types of coding systems and describe any benefits or issues when using them for a chart of accounts.

Answer 1

Codes are unique identifications. These are given for accounting heads; but these are not universal, since accounting codes may be different from company to company.

Types are as below:

Abbreviated codes: This is given by abbreviated letters; like “PAT” that means profit after tax, “AVC” that means average variable cost, etc.

Benefits: (1) It sorted out the space problem, since the full name cannot be written in a small space. (2) It saves time, since the writing in full may be time consuming.

Issues: (1) Those who are not in the field of accounts may not understand such short form. (2) Two separate letters may have one abbreviation, which may create difficulty in separation; suppose “FC” indicates “fixed cost” and “full capacity” both.

Numbering codes: Accounting heads may be numbered, like cash account is 001, capital account is 008, etc.

Benefits: (1) This is the easiest way of coding. (2) Each head gets a unique code within the company.

Issues: (1) Remembering those numbers could be difficult.