Page 106 - Accounting Information Systems

CHAPT E R 2 Introduction to Transaction Processing 77

ADVANTAGES. Sequential coding supports the reconciliation of a batch of transactions, such as sales
orders, at the end of processing. If the transaction processing system detects any gaps in the sequence
of transaction numbers, it alerts management to the possibility of a missing or misplaced transaction.
By tracing the transaction number back through the stages in the process, management can eventually
determine the cause and effect of the error. Without sequentially numbered documents, problems of this
sort are difficult to detect and resolve.

DISADVANTAGES. Sequential codes carry no information content beyond their order in the sequence.
For instance, a sequential code assigned to a raw material inventory item tells us nothing about the attri-
butes of the item (type, size, material, warehouse location, and so on). Also, sequential coding schemes
are difficult to change. Inserting a new item at some midpoint requires renumbering the subsequent items
in the class accordingly. In applications where record types must be grouped together logically and where
additions and deletions occur regularly, this coding scheme is inappropriate.
Block Codes

A numeric block code is a variation on sequential coding that partly remedies the disadvantages just
described. This approach can be used to represent whole classes of items by restricting each class to a
specific range within the coding scheme. A common application of block coding is the construction of a
chart of accounts.
A well-designed and comprehensive chart of accounts is the basis for the general ledger and is thus
critical to a firm’s financial and management reporting systems. The more extensive the chart of accounts,
the more precisely a firm can classify its transactions and the greater the range of information it can pro-
vide to internal and external users. Figure 2-33 presents an example of accounts using block codes.
Notice that each account type is represented by a unique range of codes or blocks. Thus, balance sheet and
income statement account classifications and subclassifications can be depicted. In this example, each of the
accountsconsistsofathree-digitcode.Thefirstdigitistheblockingdigitandrepresentstheaccountclassification;
forexample,currentassets,liabilities,oroperatingexpense.Theotherdigitsinthecodearesequentiallyassigned.

ADVANTAGES. Block coding allows for the insertion of new codes within a block without having to
reorganize the entire coding structure. For example, if advertising expense is account number 626, the

FI G U R E
2-33 CHART OF ACCOUNTS

Chart of Accounts
Account Ranges:
Current Assets
100 Current Assets 110 Petty Cash
200 Fixed Assets 120 Cash in Bank
300 Liabilities 130 Accounts Receivable
400 Owner's Equity 140 Inventory
500 Revenue 150 Supplies
600 Operating Expense
700 Cost of Sales Fixed Assets
210 Land
Sequential Code 220 Buildings
230 Plant and Equipment
Blocking Code Liabilities
310 Accounts Payable
320 Notes Payable
Owner's Equity
410 Capital Stock
420 Retained Earnings