You are BOTH right.
1) Computer hardware (chips, drives etc) have a special signal line into them called the Reset line. When you press the reset button, all the hardware gets interrupted and reset. The computer starts up. It's DESIGNED to work like that. The hardware is unaffected.
2) The SOFTWARE (Windows for most people, Linux or Mac or whatever for some) hates this. It's continually loading and saving files, and if the computer is reset while a file is saving, then the software gets messed up. Sometimes the software is smart enough to work this out - but most of the time it isn't, because it's not expecting to be reset without a warning.
SO; Hardware is designed to be reset (it resets so it all starts up in a fresh condition); software ISN"T.
The computer is fine PHYSICALLY, but Windows often won't start up.
So, from a PRACTICAL point of view, you are right; from a technical or literal point of view, your friend is right.
Real life is rarely black and white / good or bad. It all depends on which angle you are looking from.
The reset button is there for when the computer is locked up (frozen). Although, to be honest, I generally recommend using the power button (holding it down for a few seconds) to turn the machine off completely.
It gets reset when it turns on anyway.