Things They Don't Teach You in Business School

How Computers Learned Accounting: The Surprising Story of Debits, Credits, and Negative Numbers

Computers and Accounting

As you may have seen in the movie Imitation Game, computers were used during WW2, some to break codes and some to do military logistics. My question is, what happened after the war? Where did those computers go? Where did they work?

Well, accounting was a good place to put them, mainly because the transactions must be added up, subtracted, processed, stored, and easily recovered. The only thing necessary was to program the computers to understand the language of accounting.

The first thing was to program the complete accounting equation into the computer which was easy enough to do since the formula is pure logic:

Assets = Liabilities + Equity + (Revenues – Expenses)

While on the surface the formula was easily programmed, the math part was a bit of a challenge. The entries are just increases and decreases to accounts, but how do I "teach" the accounts what are increases and decreases to accounts? To accountants the words Debit and Credit are used to indicate an increase or decrease, but how a debit and credit impact an account depends on the type of account it is.

A long time ago someone came up with the plan that Debits will increase Assets and Expenses, and Credits will decrease Assets and Expenses. And, Credits will increase the Liability, Revenue and Equity; debits will decrease with a Debit. And the "Normal Balance" of an account will be the side that increases the account. So, Assets and Expenses will have a "Normal Balance" of a Debit/Positive number. And by default, Liabilities, Revenue and Equity will have a "Normal Balance" of a Credit/Negative number. That's rather simple. We can now show the complete Accounting Equation as:

Debits(+)   =   Credits(−)   +   Credits(−)   +   (Credits(−)   −   Debits(+))
Assets       =   Liabilities   +     Equity     +    (Revenues     −     Expenses)

Now, let's load that equation program into the computer and let the fun begin.

Everything went extremely well, until….it came time to produce the Financial Statements. Can you imagine the look on management's face when the Income Statement shows a Profit with a negative number? What???!! How can we have a negative number as a profit? Easily, the negative number shows that there were more Revenues, entered into the files as a negative number, than there were Expenses which were entered into the files as a positive number. Wow!! My mind is numb! I can't take this.

And if you thought that was hard to sell to management, wait until they saw the Balance Sheet and saw that Liabilities and Equity had negative numbers. How can we be profitable and have negative equity??!!

And then someone remembered their 5th-grade math teacher who taught one of the rules of mathematics: a positive number multiplied by a negative number results in a negative number. And a negative number multiplied by a negative number results in a positive number. So, behind the scenes, when we execute a Print function, we set Revenues, Liabilities, and Equity to be multiplied by -1, which results in a positive number. BOOM!! Problem solved.

Who said accounting isn't fun??

Frequently Asked Questions

When were computers first used in accounting?

Computers moved into business accounting shortly after World War II. Wartime machines built for code-breaking and military logistics were well suited to accounting because the work involves adding, subtracting, processing, storing, and retrieving large volumes of transactions — exactly what early computers did best.

What is the accounting equation?

The complete accounting equation is Assets = Liabilities + Equity + (Revenues – Expenses). It is the logical foundation of double-entry accounting and the first thing programmers taught early business computers.

Why do accounting systems store credits as negative numbers?

Inside an accounting system, every entry is simply an increase or a decrease. Accounts with a normal debit balance (assets and expenses) store as positive numbers, while accounts with a normal credit balance (liabilities, equity, and revenue) store as negative numbers. This convention lets the entire accounting equation always balance to zero inside the computer.

What is a "normal balance" in accounting?

An account's normal balance is the side — debit or credit — that increases that account. Assets and expenses carry a normal debit balance; liabilities, equity, and revenue carry a normal credit balance.

If revenue is stored as a negative number, why do financial statements show it as positive?

When reports print, the system multiplies revenue, liability, and equity balances by negative one. A negative number multiplied by a negative number is positive, so the financial statements display the figures the way management expects to read them — even though the underlying data stores with opposite signs.

Do modern accounting systems still work this way?

Yes. The same debit-and-credit logic from the earliest business computers still powers modern accounting software. Plus & Minus — whose name comes from exactly this positive-and-negative principle — builds on that foundation with a single-file architecture that processes every transaction in real time, with no separate modules to reconcile.