DATA CODING SCHEMES

Within the context of transaction processing, data coding involves creating simple numerical

or alphabetical codes to represent complex economic phenomena that facilitate efficient

data processing. In Figure 6.28, for example, we saw how the secondary keys of

transaction file records are linked to the primary keys of master file records. The secondary

and primary keys in the example are instances of data coding. In this section, we explore

several data coding schemes and examples of their application in AIS. 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. For

instance, a firm’s AR file may contain accounts for several different customers with the

same name and similar addresses. To process transactions accurately against the correct

accounts, the firm must be able to [Link]

particularly difficult as the number of similar attributes and items in the class increase. Consider the
most elemental item that a machine shop wholesaler firm might carry

in its inventory—a machine nut. 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 on the basis of these three features, as follows:

1. The size attribute ranges from ¼ inch to 1¾ inches in diameter in increments of

/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.

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.

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 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 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. ASystemwithCodes

These problems are solved, or at least greatly reduced, 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 accounts

payable 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 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.

NumericandAlphabeticCodingSchemes

Sequential Codes

As the name implies, 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 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 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 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 and where addi-

tions 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 transac-

tions and the greater the range of information it can provide to internal and external

users. Figure 6.33 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 accounts consists of a three-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

is account 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,

they 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 diverse data.

2. They allow complex data structures to be represented in a hierarchical form that is

logical and more easily remembered by humans. 3. They permit detailed analysis and reporting both
within an item class and across

different classes of items.

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 overused. 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 used for many of the same purposes as numeric codes. Alphabetic
characters may be assigned sequentially (in alphabetical order) or may be used in block

and group coding techniques.

Advantages. The capacity to represent large numbers of items is increased dramatically

through the use of 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 (10

), a two-position alphabetic

code can represent 676 items (26

). Thus, by using alphabetic codes in the same

three-digit coding space, we see a geometric increase in the potential for data representation

(10 blocks × 100 items each) 1,000 items

to

(26 blocks × 676 items each) 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 Acctg 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 be-

ing 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.