Learning Outcomes
After reading this article, you will be able to explain why coding systems are required for accounts and transactions, describe types of codes used in accounting, outline the setup and expansion of a chart of accounts, and summarise authorisation and filing procedures for secure and accurate bookkeeping. You’ll be prepared to identify and apply account codes in line with ACCA exam expectations.
ACCA Recording Financial Transactions (FA1) Syllabus
For ACCA Recording Financial Transactions (FA1), you are required to understand the principles and practicalities of coding, authorisation, and filing as they relate to financial transactions. This article focuses your revision on:
- The purpose and structure of a chart of accounts
- Methods of coding accounts and transactions
- Features of effective coding systems
- Assigning codes to invoices and credit notes for recording in the accounts
- Authorisation controls for transactions and coding
- Secure and organised filing of accounting records
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
- What is a chart of accounts and why is it important in bookkeeping?
- Why should every account and transaction have a unique code?
- Which type of code makes it immediately clear whether an account is an asset, liability, or expense?
- How does authorisation of new account codes and transactions support financial controls?
- What is the main purpose of a coding “grid stamp” on source documents?
Introduction
Accurate records are at the core of every accounting system. To record and retrieve financial transactions efficiently, businesses assign unique codes to each account and transaction, documented within a structured chart of accounts. Equally, strong internal controls over the creation of new codes and the authorisation of transactions prevent misallocation and fraud. Well-organised filing then ensures all records can be readily located, checked, and referenced as needed.
This article explains how coding systems work, how account codes are constructed, the structure and use of a chart of accounts, and the internal controls required for authorisation and secure filing.
Key Term: coding system
A method of assigning unique identifiers to accounts, transactions, or documents to enable systematic recording and retrieval.
The Chart of Accounts: Structure and Purpose
A chart of accounts is the backbone of any accounting system. It lists all accounts a business uses—assets, liabilities, equity, income, and expenses—each with a unique code.
Key Term: chart of accounts
An organised listing of all accounts used in the bookkeeping system, each with a unique code and title.
A well-designed chart of accounts allows consistent recording, reporting, and expansion as the business evolves. Every ledger entry refers to one of these codes, supplying clear evidence of where transactions belong.
Hierarchical and Block Coding
Most accounting systems use a block or hierarchical structure for account codes. For example, all assets may begin with "1", liabilities with "2", income with "4", and expenses with "5". Blocks and sub-blocks make it easy to group related accounts and identify account types at a glance.
Key Term: block code
A coding structure where related account types are grouped together in a designated range of numbers.Key Term: hierarchical code
A type of block code where each digit or segment represents a different level of classification, narrowest at the right.
Significance of Codes
Using a logical code system avoids confusion and errors—especially where account names are similar. It also speeds up data entry in computerised systems, where codes are processed faster and with less risk of duplication or misposting.
Types of Codes Used in Accounting
Account and transaction coding can use several systems:
- Sequential codes: Simple numeric series without inherent meaning.
- Mnemonic codes: Alpha or alphanumeric combinations that hint at the item (e.g. SUP001 for supplier Robertson).
- Significant digit codes: Numeric codes where sub-sections indicate details like department, product, or location.
Key Term: mnemonic code
A code formed using letters or combinations that relate to the name or description of the item.Key Term: significant digit code
A numeric code in which each digit or section holds specific meaning about the item or transaction category.
Assigning Codes: Applying the Chart of Accounts in Practice
When recording transactions, the correct account code from the chart of accounts is entered on source documents (such as invoices, journal entries, or credit notes). This assignment is often written by hand or included on a “grid stamp” or coding box on the document.
Key Term: grid stamp
A stamp or printed table added to source documents, used to record the allocation of codes, authorisations, and processing checks.
Worked Example 1.1
A company receives a supplier invoice for office cleaning. The expense account "Office Cleaning" has been assigned code 5230 under the block for office expenses (5200–5299). The accounts clerk checks the expense and writes "5230" in the coding box before posting the invoice.
Answer:
Assigning the code 5230 avoids delays and errors, ensuring the expense appears in the correct account for reporting.
Expansion and Flexibility
Efficient systems allow new codes to be added for new departments, products, or accounts without disrupting the existing structure. Controls must be in place to authorise all new codes to maintain order and prevent unauthorised accounts.
Filing and Authorisation Procedures
Security and accuracy in an accounting system require robust internal controls:
- All new account codes are approved by a responsible manager.
- Every transaction code is checked for consistency and duplication.
- Changes to the chart of accounts are documented and reviewed regularly.
The authorisation process safeguards against errors or fraud, ensuring only reasonable and necessary codes are introduced.
Key Term: authorisation
The process of granting formal approval before new codes, accounts, or transactions are created or recorded.
Transaction documents and coding records must be securely filed for future audit, retrieval, and reference. Filing should be systematic—by date, code, supplier/customer, or document number—as suits the business.
Worked Example 1.2
The purchasing department requests a new code for a lease expense not previously tracked. The accounts manager reviews the need and adds "5380 Lease Costs" to the chart of accounts after documenting the approval.
Answer:
Formal authorisation prevents unapproved or duplicate codes from confusing the records.
Exam Warning
When inputting codes, always use the exact code from the current chart of accounts—never guess. Using the wrong code risks misclassifying transactions and distorting reports.
Summary
A systematic coding system, embodied in a well-structured chart of accounts, underpins reliable financial records. Block, hierarchical, mnemonic, and significant digit coding methods allow for clarity and growth. Authorisation of new codes strengthens controls, while secure filing ensures that every transaction and its coding can be tracked and proved.
Key Point Checklist
This article has covered the following key knowledge points:
- Define the purpose and structure of a chart of accounts
- Describe types of coding used for accounts and transactions
- Explain block, hierarchical, and mnemonic code systems
- Set out the features of effective and flexible coding structures
- Recognise the function and use of coding boxes or grid stamps
- Outline internal controls for code authorisation
- Identify secure filing and documentation practices required for ACCA assessments
Key Terms and Concepts
- coding system
- chart of accounts
- block code
- hierarchical code
- mnemonic code
- significant digit code
- grid stamp
- authorisation