In comparison with incremental and traditional absolute encoder, the single-ring absolute encoder processes more advantage. And the research of decoding system and algorithm are essential to the single-ring absolute encoder. In order to improve single-ring absolute photoelectric encoder′s circuit integration, response speed and accuracy, a decoding system was designed in this paper. Linear CCD was used in this system as the disc image receiving and photoelectric conversion device which also provided the basement of subdivision algorithm. And FPGA was used to achieve circuit control and decoding algorithm. A new decoding algorithm was also proposed in this paper. On the one hand, the coding information was achieved by counting high electrical level of the binaryzation signal of CCD′s output. Coding information was obtained by recognition of the disc image and combination of 12-bits coding number. On the other hand, precise value was obtained by calculating the shifting between the centroid of image and virtual center. The centroid of stripe was calculated based on CCD centroid location algorithm. Finally, the value of angle was precisely received from combination of these two values. A prototype of theodolite was developed based on this single-ring absolute encoder decoding system and can reach the accuracy of 2".