- Individuals often ask,
do I really need to know the difference
between a debit and a credit?
Haven't computers kind of taken care of all that?
Well, computers have greatly facilitated
a business's ability to quickly process huge amounts
of information without making mathematical errors.
Most computers can make millions
of calculations per second
and produce more documents in 10 minutes
that a person could do in an entire week.
The time spent posting
and journalizing entries
and summarizing accounts into a trial balance
has been greatly reduced as a result
of computers but computers still can't think.
That it turns out, that's your job.
Walk up to a computer terminal
and show it a sales invoice
and the computer will just sit there and wait.
Wait for what?
For the answer to three questions.
What accounts are involved?
Did the accounts increase or decrease?
And by how much did each account change?
Let's consider how one
of the bestselling money management software packages,
Quicken has changed the accounting process.
Quicken, it turns out, works a lot like a check register.
For each check you indicate the date,
the check number, the payee and the amount.
Quicken then prompts you to indicate the nature
of the expenditure
by selecting from a list of accounts.
For example, if your expenditure relates
to your purchase of groceries,
you would select the account food.
Thus all your transactions relating to food
would be grouped together
allowing you to quickly determine
all food expenditures.
Now let's review what Quicken has done.
First since you indicated the transaction
involved a check,
Quicken knows that cash decreased,
Quicken is programmed to know
that when cash decreases,
it involves a credit to the cash account.
Quicken also has also been programed
to know that debits have to equal credits
and since cash was credited,
the program knows that something else was debited.
Since you indicated food
and expense was the other account,
Quicken debits that account
causing your expense account to increase.
Now instead of telling Quicken which accounts
to debit and credit,
you're required to identify the accounts,
that's question one and indicate
if they increased or decreased,
that's question two.
Quicken is able to determine based
on the answer to these two questions
which accounts were debited
and which accounts were credited.
So, has Quicken fundamental changed
the accounting process?
No.
It's increased the accuracy and speed
with which the posting process is done
as well as the speed with which a variety
of reports can be prepared.
Quicken has also eliminated the need
for the user to specify debit or credit.
Because computers are so fast,
the two-step process of identifying accounts
and the direction of their change
can be done as quickly as you can say credit cash.
So, why don't accountants get rid
of these 500-year-old terms, debit and credit?
The reason is that all accountants
are familiar with and comfortable using these terms.
When someone says credit cash,
accountants everywhere know exactly what that means
thus debit and credit provide
a useful shorthand method of communication.
Now the computer has also enhanced step three
of the accounting cycle, summarizing.
In fact, only in the smallest of businesses
will you find the posting of journal entries
and the preparation of a trial balance
being done by hand
but in every business,
from the largest to the smallest,
you will find accountants still actively involved
in analyzing transactions
and turning those transactions into journal entries
and eventually they get turned
into useful accounting reports.