PART C: SOURCE DOCUMENTS AND CODING

Study Guide Intellectual level

B Source documents and coding

1 Source documents

(a) Describe the material control cycle (including the K

concept of 'free' inventory, but excluding control levels
and EOQ) and the documentation necessary to order,
receive, store and issue materials
(b) Describe the procedures required to ensure the correct K
authorisation, analysis and recording of direct and
indirect material costs.
(c) Describe the procedures required to ensure the correct K
authorisation, coding, analysis and recording of direct
and indirect labour and expenses
A (d) Describe the procedures required to ensure the correct K

C
analysis and recording of sales
2 Coding system
C (a) Explain and illustrate the use of codes in categorising and S
A (b)
processing transactions
Explain and illustrate different methods of coding data K
(including sequential, hierarchical, block, faceted and

G
mnemonic)
(c) Identify and correct errors in coding of revenue and S
L expenses

O
B Two of the technical competences for FPER that relate to paper MA1 are to verify and record
A purchases and payments from originating documents and also to verify and record income and receipts
from originating documents. You can apply the knowledge you obtain from this chapter of the text to
L help to demonstrate these competences.
The ACCA have produced a Competency Framework to help students understand and develop the
professional skills employers want. To access the competency framework please visit:
B http://competencyframework.accaglobal.com/
O
X
. 1 Coding
C For elements of cost and income to be correctly analysed, classified and recorded they must initially be
O correctly coded for entry into the accounting records.

M We have discussed the various types of income and expenditure, and the importance of ensuring that
these items are recorded accurately so as to ensure accurate management information. We will now look
at the practical aspects of ensuring this.
In many organisations, income and expenditure items are coded before they are included in the
accounting records. Coded means giving something a code. What exactly is a code?

A code is a system of words, letters, figures or symbols used to represent others.

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CHAPTER 5 // SOURCE DOCUMENTS AND CODING

Most organisations use computers to record their accounting transactions because they have the
following advantages.
 They record and retrieve information quickly and easily.
 They are automatically accurate and have built in checking facilities.
 They can file a large amount of information in a small space.
 They are capable of sorting information in many different ways.
Management information is only one part of the organisation's information system, which will be based
on transaction processing (data processing). Other applications can be built on top of the basic
information system, and spreadsheets can be used in conjunction with it for reporting purposes.
The information system will also support the needs of the financial accounts which, as we have
explained, are subject to external regulations. Under UK company law, directors are responsible for
ensuring that accounting records do the following.
 Show an analysis of all income and expenditure
 Show the financial position of the company at any particular moment in time A
 Record all assets and liabilities of the company (including inventory where applicable)
C
Accounting records must be retained for future reference.
Some information must be separately identifiable in order to meet other regulatory requirements (for
C
example, sales tax) or specific accounting requirements (for example, donations to political causes or A
charities).
Some computer systems are able to sort information from transaction processing into the correct categories
for both financial and management accounting purposes. This avoids the need to enter data more than once. G
When data is entered into an accounting system, each item is coded with a specific code from a list of
accounts.
L
Codes can be alphabetical and/or numerical. The length and complexity of a coding system will depend O
upon the needs and complexity of the organisation.
B
For financial accounting purposes it is common to use general ledger codes which correspond to the
different areas of the statement of financial position and income statement. A
L
1.1 Features of a good coding system
A good coding system will possess the both of the following features:
 Items each have a unique code
B
 Codes are uniform in structure and length O
1.2 Types of code X
Here are some examples of codes. .
(a) Sequential (or progressive) codes C
Numbers are given to items in ordinary numerical sequence, so that there is no obvious O
connection between an item and its code. For example:
000042 4 cm nails
M
000043 Office stapler
000044 Hand wrench
(b) Block (or group classification) codes
These are an improvement on simple sequences codes, in that a digit (often the first one)
indicates the classification of an item. For example:
4NNNNN Nails
5NNNNN Screws
6NNNNN Bolts
(Note. 'N' stands for another digit; 'NNNNN' indicates there are five further digits in the code.)

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 PART C: SOURCE DOCUMENTS AND CODING

(c) Faceted codes

These are a refinement of block codes, in that each digit of the code gives information about an
item. For example:
(i) The first digit: 1 Nails
2 Screws
3 Bolts
etc…
(ii) The second digit: 1 Steel
2 Brass
3 Copper
etc…
(iii) The third digit: 1 50mm
2 60mm

A 3 75mm
etc…
C A 60mm steel screw would have a code of 212.

C (d) Mnemonic codes

A Meaning of mnemonic is a learning technique to aid the memory. Under this type of coding the
code means something, it may be an abbreviation of the object being coded. A well-known
example of this type of code is the three letter coding used for airports. For example:

G LAX
CAI
Los Angeles
Cairo
SIN
LHR
Singapore
London Heathrow
L (e) Hierarchical codes
O This is a type of faceted code where each digit represents a classification, and each digit further

B
to the right represents a smaller subset than those to the left. For example:
3 = Screws 32 = Round headed screws
A 31 = Flat headed screws 322 = Steel (round headed) screws

L and so on
A coding system does not have to be structured entirely on any one of the above systems. It can mix the
various features according to the items which need to be coded.

B 1.3 Example: numeric codes

O Type of account Code range
X Non-current asset 1000 – 1999
. Current asset 2000 – 2999
C Current liability 3000 – 3999
O Revenue 4000 – 4999
M Long-term liability 5000 – 5999

Capital 6000 – 6999

Within each section, the codes can be broken down into smaller sections:

Fixtures and fittings 1000 – 1099

Land and buildings 1100 – 1199

Plant and machinery 1200 – 1299

Motor vehicles 1300 – 1399

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CHAPTER 5 // SOURCE DOCUMENTS AND CODING

And so on. Gaps between the numbers used give scope for breaking the categories down further (for
example, there could be a separate account for each building) and for adding new categories if
necessary.
This is an example of a block coding system.
Some types of account require more detail. For example, each customer needs a separate account,
although in the statement of financial position the total 'receivables' will be shown. Suppliers (payables)
also need an account each and a total for the statement of financial position.
Alphabetical codes, using part of the company or person's name, are common but, because names can
be duplicated, an additional code may be necessary.

1.4 Example: alphabetical codes

Customer Code

J Miller Co MIL 010 A

M Miller MIL 015 C
A Milton MIL 025 C
Some computer systems save time for operators by offering a 'menu' of accounts when part of the name A
is typed in.

G
Some codes can help users to recognise the items they describe. For example, a shoe shop could code
their inventory by type of shoe, colour, size, style and male or female. A pair of red women's sandals,
size 5, style 19 could then become:
L
Shoe type Colour Size Style Male/Female O
SA R 5 19 F
B
BO B 8 11 M
A
And the second item would be men's brown boots, size 8, style 11. L
We have already stressed the importance of coding costs and revenues correctly for management
information (and financial accounting) purposes. The key to achieving this in any organisation is an
understanding of the coding list and any related guidance in the policy manual. B
We have already explained that correct coding requires you to have a good understanding of the
organisation as well as the coding list. You need to know the following.
O
 The main activities of the organisation
X
 The main sources of income .

C
The main items of expenditure
 Details of the organisational structure
In some cases, you may need to ask for help from other people in order to code transactions correctly. O
An organisation chart can help to make sense of the coding structure. Here is a simple one for an M
accounting firm divided into departments.
Partners

Audit Taxation Corporate finance General administration

Coding errors can happen in a variety of ways, such as errors in keying in the original data and applying
the wrong code (because either the transaction or the coding structure have not been understood).
When management information is produced, large errors are often obvious. For example, a doubling of
sales revenue in one month is rather unlikely unless there has been a sales campaign in that month. It is
more likely that a decimal point has been misplaced in a figure or another form of income has been
incorrectly coded to sales revenue.

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 PART C: SOURCE DOCUMENTS AND CODING

1.5 The advantages of a coding system

(a) A code is usually briefer than a description, thereby saving clerical time in a manual system and
storage space in a computerised system.
(b) A code is more precise than a description and therefore reduces ambiguity.
(c) Coding facilitates data processing.

1.6 Example: coding problems

Motor expenses for the three cars belonging to J Miller & Son are all coded to a single expense account
and are usually around $1,200 a month. In June the total is almost $15,000. Mr Miller (the firm's
owner) asks you to look into the reasons why. You decide to get a print-out of the motor expenses
account for June. It looks like this.
Code M057 Motor expenses $
3.6.X1 Petrol 22.70
A 5.6.X1 Petrol 18.50
7.6.X1 Repairs to S 657 PNO 235.70
C 8.6.X1 Petrol 22.00

C
10.6.X1 Petrol 18.00
12.6.X1 Tyres for R 393 FGH 140.00
A 15.6.X1
18.6.X1
Petrol
Petrol
24.50
230.00
22.6.X1 Purchase of T 191 PJF 12,950.00
25.6.X1 Petrol 21.50
G 29.6.X1 Road tax R 393 FGH 155.00
30.6.X1 Depreciation charge S 657 PNO 290.00
L 30.6.X1 Depreciation charge R 393 FGH 250.00

O
30.6.X1 Depreciation charge T 191 PJF 310.00
Total for the month of June $14,711.55
B (a) There are two problems which should be fairly obvious:
A 18/6 $230 seems an unlikely petrol bill.

L
22/6 The purchase of a car has been coded to expenses instead of non-current assets.
There are also bills for repairs, tyres and road tax all in one month which is probably not typical.
Having spotted these anomalies, you should now act by investigating them, correcting any errors.

B (b) (i) The petrol receipt should be checked and the entry corrected.

O
(ii) The entry for the purchase of the car should be corrected, ie removed from the expense
account and re-entered under the appropriate non-current asset code. Any items of
X expenditure on long-term non-current assets which a company intends to retain for its own
use are capital items, not expense items.
. (iii) No action is needed for the other motor expenses which are correctly coded.
C
O EXAM FOCUS POINT
M This area featured in the December 2014 examiner's report as a specific example of somewhere that
candidates scored especially poorly in their exam. Candidates need to understand the function of the
various documents used in the materials control cycle.

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