When computers were first tasked with doing accounting functions, there was a major league problem. In order to have an orderly journal entry, the total amount of the debit column had to equal the total amount in the credit column. This presented a programming challenge.
How does one teach/program a computer the difference between a debit and a credit? “Aha!” said someone: we will have the debits be positive numbers and the credits be a negative number. That way when the computer calculates the total debits and credits, the mathematical result will be equal to ZERO; thus, the entry is balanced.
Terrific! What could possibly go wrong?
There was a cosmetic flaw in the plan. Since Revenues have a Credit balance, they showed up in the Income Statement as a negative number. And if there was a profit, then the Net Profit showed as a negative number because the credits/revenues were greater than the debits/expenses.
Could you imagine being the poor person who had to present the financial statements to management and explain that a negative number as a Net Profit was a good thing? Yeah, right. What? A Negative Net Profit is not only possible but also a good thing? And the company has a negative amount of Liabilities and Equity? This needed to be fixed.
Finally, someone remembered their sixth-grade teacher saying that a positive multiplied by a negative 1 will produce a negative number. And a negative multiplied by a negative 1 will result in a positive number. BOOM! The problem is fixed by the humble negative 1.
Even today, most accounting software programs use the same logic for the recording of debits and credits; however, behind the scenes, all financial statements do the multiplication by negative 1 before the financial statements are produced.
One simple lesson from a teacher can go a long way to make your life easier.
