DATA CODING SCHEMES

Within the context of transaction processing, data coding involves creating simple numeric or alphabetic codes to
represent complex economic phenomena that facilitate efficient data processing. To emphasize the importance of
data codes, we first consider a hypothetical system that does not use them

A SYSTEM WITHOUT CODES

Firms process large volumes of transactions that are similar in their basic attributes. To process transactions
accurately against the correct accounts, the firm must be able to distinguish one John Smith from another. This task
becomes particularly difficult as the number of similar attributes and items in the class increase . Assume that
the total inventory of nuts has only three distinguishing attributes: size, material, and thread type. As a result, this
entire class of inventory must be distinguished based on these three features, as follows:

1. The size attribute ranges from 1/4 inch to 1 1/4 inches in diameter in increments of 1/64 of an inch, giving 96 nut
sizes.
2. For each size subclass, four materials are available: brass, copper, mild steel, and case-hardened steel.
3. Each of these size and material subclasses come in three different threads: fine, standard, and coarse.

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.

Inventory—nut, 1⁄2 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 obviously 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 andeffort 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

By using codes to represent each item in the inventory 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 version 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 an
d accounts within a file.
4. Support the audit function by providing an effective audit trail.

NUMERIC AND ALPHABETIC CODING SCHEMES

Sequential Codes
A common application of numeric sequential codes (ascending or descending) 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 documents. Digital documents are similarly assigned a
sequential number by the computer when they are created.

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 tracinthe 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 attributes 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 andb 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.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 provide to internal and external users.

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. Each of the
accounts consists of a thre-digit code. The first digit is the blocking digit and represents the account classification; for
example, current assets, liabilities, or operating expense. The other digits in the code are sequentially
assigned.

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 isaccount number 626, the first digit indicates that this account is an
operating expense. As new types of expense items are incurred and have to be specifically accounted for, thy may
be added sequentially within the 600 account classification. This three-digit code accommodates 100
individual items (X00 through X99) within each block. Obviously, the more digits in the code range, the more
items that can be represented.

DISADVANTAGES
. As with the sequential codes, the information content of the block code is not readily apparent. For
instance, account number 626 means nothing until matched against the chart of accounts, which identifies it as
advertising expense.

Group Codes
Numeric group codes are used to represent complex items or events involving two or more pieces of
related data. The code consists of zones or fields that possess specific meaning. For example, a
department store chain might code sales order transactions from its branch stores as follows:
Store Number Dept. Number Item Number Salesperson
04 09 476214 99

ADVANTAGES
. Group codes have a number of advantages over sequential and block codes.
1. They facilitate the representation of large amounts of diversedata.
2. They allow complex data structures to be represented in a hierarchical form that is logical and moreeasily
remembered by humans.
3. They permit detailed analysis and reporting both within an item class and across different classes ofitems.

Using the previous example to illustrate, Store Number 04 could represent the Hamilton Mall store in
Allentown; Dept. Number 09 represents the sporting goods department; Item Number 476214 is a hockey stick;
and Salesperson 99 is Jon Innes. With this level of information, a corporate manager could measure profitability
by store, compare the performance of similar departments across all stores, track the movement of specific
inventory items, and evaluate sales performance by employees within and between stores.

DISADVANTAGES
. Ironically, the primary disadvantage of group coding results from its success as a classification tool.
Because group codes can effectively present diverse information, they tend to be over used. Unrelated data may
be linked simply because it can be done. This can lead to unnecessarily complex group codes that cannot be easily
interpreted. Finally, overuse can increase storage costs, promote clerical errors, and increase processing time
and effort.

Alphabetic Codes
Alphabetic codes are usedfor many of the same purposes as numeric codes. Alphabetic characters may be
assigned sequentially (in alphabetic order) or may be used in block and group coding techniques.

ADVANTAGES
. The capacity to represent large numbers of items is increased dramatically using pure alphabetic
codes or alphabetic characters embedded within numeric codes (alphanumeric codes). The earlier example of a
chart of accounts using a three-digit code with a single blocking digit limits data representation to only 10 blocks of
accounts—0 through 9. Using alphabetic characters for blocking, however, increases the number of possible
blocks to 26—A through Z. Furthermore, whereas the two-digit sequential portion of that code has the capacity
of only 100 items (102), a two-position alphabetic code can represent 676 items (262). Thus, by using alphabetic
codes in the same thre-digit coding space, we see a geometric increase in the potential for data representation.

(10 blocks x 100 items each) = 1,000 items

to
(26 blocks x 676 itemseach) = 17,576 items

DISADVANTAGES
. The primary drawbacks with alphabetic coding are (1) as with numeric codes, there is difficulty rationalizing the
meaning of codes that have been sequentially assigned, and (2) users tend to have difficulty sorting
records that are coded alphabetically.

Mnemonic Codes
Mnemonic codes are alphabetic characters in the form of acronyms and other combinations that
convey meaning. For example, a student enrolling in college courses may enter the following course codes on the
registration form:

Course Type Course Number

Acctg 101
Psyc 110
Mgt 270
Mktg 300

This combination of mnemonic and numeric codes conveys a good deal of information about these
courses; with a little analysis, we can deduce that cctg is accounting, Psyc is psychology, Mgt is
management, and Mktg is marketing. The sequential number portion of the code indicates the level of each
course. Another example of the use of mnemonic codes is assigning state codes in mailing addresses:

Code Meaning
NY New York
CA California
OK Oklahoma

ADVANTAGES
. The mnemonic coding scheme does not require the user to memorize meaning; the code itself conveys a
high degree of information about the item that is being represented.

DISADVANTAGES
. Although mnemonic codes are useful for representing classes of items, they have limited ability to represent items
within a class. For example, the entire class of accounts receivable could be represented by the mnemonic code AR,
but we would quickly exhaust meaningful combinations of alphabetic characters if we attempted to represent the
individual accounts that make up this class. These accounts would be represented better by sequential, block,
or group coding techniques.