As the traditional optical encoder has the deficiency of coding complicatedly, high price and difficult to miniaturization, this paper introduces a new coding scheme of single-ring absolute optical encoder, and then illustrates the decoding and absolute-position calculation method of the coding grating ruler image, which is acquired through array image sensor, and processed by using digital image processing technology. The results of both computer simulation and actual measurement show that, the single-ring absolute optical encoder encodes simply, and has high measurement accuracy. And it is not sensitive to the changes in light intensity. The encoder has low installation requirements and a broad application prospect.