The following excerpt is from a conversation between Peter Kaiser, the president and chief operating officer of Sprocket Construction Co., and his neighbor, Doris Nesmith:
Doris: Peter, I’m taking a course in night school, “Intro to Accounting.” I was wondering—could you answer a couple of questions for me?
Peter: Well, I will if I can.
Doris: Okay, our instructor says that it’s critical we understand the basic concepts of accounting, or we’ll never get beyond the first test. My problem is with those rules of debit and credit . . . you know, assets increase with debits, decrease with credits, etc.
Peter: Yes, pretty basic stuff. You just have to memorize the rules. It shouldn’t be too difficult.
Doris: Sure, I can memorize the rules, but my problem is I want to be sure I understand the basic concepts behind the rules.
For example, why can’t assets be increased with credits and decreased with debits like revenue? As long as everyone did it that way, why not? It would seem easier if we had the same rules for all increases and decreases in accounts. Also, why is the left side of an account called the debit side? Why couldn’t it be called something simple . . . like the “LE” for Left Entry? The right side could be called just “RE” for Right Entry. Finally, why are there just two sides to an entry? Why can’t there be three or four sides to an entry? In a group of four or five, select one person to play the role of Peter and one person to play the role of Doris.
1. After listening to the conversation between Peter and Doris, help Peter answer Doris’s questions.
2. What information (other than just debit and credit journal entries) could the accounting system gather that might be useful to Peter in managing Sprocket Construction Co.?