In accounting, we live by a code—the accounting code. Treating your accounting system like a google search bar every time you enter a transaction, is not time efficient. Instead, bookkeepers and accountants rely on short-hand accounting codification to quickly key an invoice.
In this article:
- What is an accounting code?
- Benefits of an accounting coding system
- Different accounting codes and classifications structures
- 3 digit vs 6 digit chart of accounts
- Chart of accounts number list for a small business
What Is An Accounting Code?
An accounting code is a numbering system for the chart of accounts. The chart of accounts is an organized list of all business accounts that stores financial transactions. A uniform accounting code made up of letters and/or numbers facilitates data organization and aids accounting error inquiries. The type of code used is different per industry and depends on how many accounts a company has.
Benefits Of An Accounting Coding System
Your business is like a financial library. If all your transactions were books, you would never find them if they were out of order, piled in a dark corner. Instead, they should be filed neatly, so you can revisit them when the need arises. Following an accounting classification structure for your daily operations has so many benefits:
- Reduces time for data entry
- It is one system for many users
- Simplifies financial reporting for large companies
- Facilitates research for accounting errors
- Mitigates improper or creative accounting
How To Create A Chart Of Accounts Numbering System
Any size business can benefit from an accounting code. Small businesses tend to go for a simple chart of accounts number list. For large companies spread out globally, organizing branches and departments into a bookkeeping coding system to comply with FASB/GAAP standards is a must. Here is how to create a chart of accounts numbering system for any size business:
Different Accounting Codes and Classifications
Accountant coding systems depend on the size of the business. Generally, this is something that is implemented at the inception of the business and serves the company’s unique financial position. Here are different types of accounting classification structures:
1. Sequential Coding
This system is a general ledger accounting codes list. It follows a basic sequence (00, 01, 02, 03…), to find daily entries in the general ledger. A sequential coding system also helps when organizing subsets of the main account.
2. Block Coding
This code organizes data into sets or blocks of numbers. Blocks are usually found in multiples of 10 (like 100, 1000, etc) but can be as many digits as desired. The typical numbering system will incorporate a mix of block coding and sequential coding, for a 3 digit chart of accounts.
For Example: 100-199 = a block of asset accounts; 100 = Cash Asset; 101 = Marketable Securities Asset; 102 = Accounts Receivable Asset, etc.
3. Hierarchical Coding
This is a decimal system that can build on any coding system. It will organize a wide array of accounting data into sections and subsections.
For Example: 100.01 = Cash Assets, for Store 1; 100.01.021 = Cash Assets, for Store 1, in 2021.
More commonly, a hierarchical code for a chart of accounts utilizes dashes instead of decimals. The uniform accounting code for a multimillion-dollar company would number division first, department second, and account last.
For Example: 01-100 = Store 1-Cash Assets; 02-01-100 = Store 2-Apparel-Cash Assets
3 Digit vs 6 Digit Chart Of Accounts Number Format
The main difference between a 3 digit vs 6 digit accounting code is company size. Most businesses will use a 3 digit chart of accounts number format. This is because most companies have less than 1000 accounts to classify. Anything more is too complex and will confuse the bookkeeping process, making data entry more difficult than it needs to be. A 6 digit chart of accounts is reserved for divisional companies, with multiple branches, who need a uniform accounting code for team members across land and sea.
Chart Of Accounts Number List For A Small Business
Most bookkeeping classification systems are a simple 3 digit chart of accounts, featuring an account code and account title. Account titles follow categories in the chart of accounts: Assets, Liabilities, Equity, Revenue, and Expenses.
See how accounts are organized into these categories in the chart below:
A specific number block will be attributed to the categories. Depending on the size of the company, the number block will be 100 or 1000 numbers. The most common coding scheme goes like this:
Assets = 100-199
Asset accounts follow the order of liquidity. That means the accounts which can be converted to cash quickly are numbered first, so cash is always 100.
Liabilities = 200-299
Liabilities are numbered from short-term to long-term. The liability account that is going to claim assets first is numbered first.
Equity = 300-399
Equity accounts are numbered by what adds the most capital to a business, to what adds the least.
Revenue = 400-499
Revenue accounts are numbered going from highest earning income accounts to lowest, starting with sales.
Expenses = 500-599
Expense accounts are numbered going from the largest expenses to the smallest expenses.
Chart Of Accounts Numbering Best Practices
Launching an accounting code from scratch is rare. Modern accounting software offers a default chart of accounts complete with an accounting code for users. But, the need may come where your business is expanding its territory, or you have to add a new loan account. Utilize our chart of accounts numbering best practices and unlock your ledger like a pro bookkeeper.