The power of the debit-and-credit system is embedded in the language of debits and credits. It's a marvelous self-checking system.
- Remember when we used to work as bookkeepers at Wasatch Medical Center? Back in the day when we were accounting students at BYU? - Those were the days. That was some real hands on experience. Keeping the books for a partnership of three busy doctors. - I started there first and you came along a couple years later after I graduated from BYU. Now by the time you got there I had the entire bookkeeping operation working like a well oiled machine. - Hey, we can conduct an entire course about the messes that you made that I had to clean up. But today, let's focus on the transition from paper based records to computer based records at Wasatch Medical Center. - Okay, good, now when I started working for the doctors, their books actually were two big physical books. - [Man] Two, why two? - [Man] Okay, well one book contained a chronological list of business events, cash collections from customers and insurance companies, payments to suppliers, payroll, payments for utilities and so forth. All these events were coded using the awesome accounting debit-and-credit language. - Well, what was in the other big book? - Okay, well the other big book was called the ledger. This book contained a page or in some cases several pages summarizing all of the business events affecting each important financial item in the business. - Yeah, a ledger. So there was a page containing a listing of all the cash collections and payments, and a page listing all the purchases from and payments to suppliers. - Exactly, now I created this ledger by laboriously going through each of the events recorded in the chronological journal, sorting them, and then copying them into the correct pages in the ledger. This processes is called posting. - Ah, got it. A journal is a chronological listing of business events using the accounting debit-and-credit language. The ledger is a copy of those same events sorted by category or account such as cash, supplies, payables to suppliers and so forth. But these two big books weren't there when I took over. What'd you do with them? - Okay, okay, sorry. Not long after I started working for the doctors, they decided to buy a mini computer and some business software. - Ah, I remember the computer and the business software. By today's standard, that computer was a large piece of work. About the size of small desk. - And it was expensive. My estimate is that the computer and software cost the equivalent of about $50,000 in today's dollars. - [Man] So what problems did you have when you converted the accounting records from the physical books to the computer? - Well, no problems really. I just had to make sure that everything added up correctly in the physical books before I then transferred the balances into the computer. - Well that could have been a nightmare. The partnership of doctors had been in existence for about 20 years and those books had been maintained by a series of part-time students during the entire time. Imagine the errors that could have accumulated over 20 years. - Well that was when I really saw the power of the simple debit-and-credit language of accounting. It's a marvelous self-checking system. - So after 20 years, no errors? - No, there was one error for nine cents. - Over those 20 years literally millions of dollars in transactions must have passed through those books, millions. - Yup, but because the power of the debit-and-credit system the error, accumulative error, 20 years, nine cents. - Well, we need to talk more about this posting process.
- Reviewing financial statements
- Analyzing transactions
- Categorizing transactions
- Obtaining financing and buying equipment
- How revenue and expenses fit in the accounting equation
- Recording the sale of goods or services
- Posting journal entries to accounts
- The accounting cycle: step by step