Page 105 - Accounting Information Systems

76 PART I Overview of Accounting Information Systems

Under these assumptions, this class of inventory could contain 1,152 separate items (96 4 3). The
identification of a single item in this class thus requires a description featuring these distinguishing attributes.
To illustrate, consider the following journal entry to record the receipt of $1,000 worth of half-inch, case-
hardened steel nuts with standard threads supplied by Industrial Parts Manufacturer of Cleveland, Ohio.
DR CR
Inventory—nut, ½ inch, case-hardened steel,
standard thread 1,000
AP—Industrial Parts Manufacturer,
Cleveland, Ohio 1,000
This uncoded entry takes a great deal of recording space, is time-consuming to record, and is obvi-
ously prone to many types of errors. The negative effects of this approach may be seen in many parts of
the organization:
1. Sales staff. Properly identifying the items sold requires the transcription of large amounts of detail
onto source documents. Apart from the time and effort involved, this tends to promote clerical errors
and incorrect shipments.
2. Warehouse personnel. Locating and picking goods for shipment are impeded and shipping errors will
likely result.
3. Accounting personnel. Postings to ledger accounts will require searching through the subsidiary files
using lengthy descriptions as the key. This will be painfully slow, and postings to the wrong accounts
will be common.

A SYSTEM WITH CODES
These problems are solved, or at least greatly reduced, by using codes to represent each item in the inven-
tory and supplier accounts. Let’s assume the inventory item in our previous example had been assigned
the numeric code 896, and the supplier in the AP account is given the code number 321. The coded ver-
sion of the previous journal entry can now be greatly simplified:

ACCOUNT DR CR
896 1,000
321 1,000
This is not to suggest that detailed information about the inventory and the supplier is of no interest to
the organization. Obviously it is! These facts will be kept in reference files and used for such purposes as
the preparation of parts lists, catalogs, bills of material, and mailing information. The inclusion of such
details, however, would clutter the task of transaction processing and could prove dysfunctional, as this
simple example illustrates. Other uses of data coding in AIS are to:
1. Concisely represent large amounts of complex information that would otherwise be unmanageable.
2. Provide a means of accountability over the completeness of the transactions processed.
3. Identify unique transactions and accounts within a file.
4. Support the audit function by providing an effective audit trail.
The following discussion examines some of the more commonly used coding techniques and explores
their respective advantages and disadvantages.

NUMERIC AND ALPHABETIC CODING SCHEMES
Sequential Codes
As thenameimplies, sequential codes represent items in some sequential order (ascending or descending). A
common application of numeric sequential codes is the prenumbering of source documents. At printing, each
hard-copy document is given a unique sequential code number. This number becomes the transaction number
that allows the system to track each transaction processed and to identify any lost or out-of-sequence docu-
ments. Digital documents are similarly assigned a sequential number by the computer when they are created.