The Problem With Numeric Account Codes
The typical account code structure uses a four or five digit numeric code that describes a primary account, followed by a hyphen, and then a two or three digit numeric code that describes a department. Historically, these codes have been stated in a numeric format.
For example, the supplies expense account might be coded as 74000, with additional department digits that look like this:
- 74000-100 = Supplies expense, accounting department
- 74000-200 = Supplies expense, production department
- 74000-300 = Supplies expense, marketing department
Alternatively, if a chart of accounts contains financial information for a number of subsidiaries (rather than departments), the supplies expense code might appear as follows:
- 74000-100 = Supplies expense, Aerial Surveys division
- 74000-200 = Supplies expense, Ground Count division
- 74000-300 = Supplies expense, Underwater Anomalies division
In either case, the employee entering journal entries or transactions must understand which department or subsidiary codes to use, which are not overly clear. Though the accounting software may state an account name somewhere on the computer screen, the employee may not see it. If so, it is entirely possible that a transaction will be charged against the wrong account code, which means that it may be charged against an incorrect department or subsidiary.
An excellent technique for avoiding incorrect account coding is to associate specific expense codes with each supplier, as well as by employing pre-built journal entry templates on a repetitive basis. Nonetheless, there is still a significant risk that unique or rarely-used transactions will be coded incorrectly.
Alphanumeric Account Codes
A possible solution to coding errors is to use alphanumeric account codes. Doing so allows you to assign a meaning to an account code. For example, the name of a department can be contracted into a three-digit code, such as ACC for the accounting department or MAR for the marketing department. This means the account codes in the preceding example for the accounting department would change from 74000-100 to 74000-ACC. Similarly, the 74000-300 subsidiary code just noted could be changed to 74000-UND to denote the Underwater Anomalies division. In short, using alphanumeric coding allows for the use of account codes that have unique meanings, and which are therefore less likely to be coded incorrectly.