Increase and decrease of ALICE accounts: A comprehensive guide

The ALICE accounting mnemonic categorises financial accounts into Assets, Liabilities, Income, Capital, and Expenses to determine whether a transaction requires a debit or credit entry. This framework simplifies the double-entry bookkeeping system by establishing consistent rules for how each account type reacts to financial changes.

This article details the specific mechanics of increasing and decreasing these five core elements to ensure balanced ledger accounts. It provides educators with a reliable pedagogical tool and helps students master the fundamental “DEAD CLIC” or “ALICE” conventions.

Readers will gain a precise understanding of the accounting equation and the directional flow of value within a business.

Key Takeaways

• Assets and Expenses increase with debit entries and decrease with credit entries according to standard accounting conventions.
• Liabilities, Income and Capital accounts increase with credits and decrease with debits to maintain the accounting equation.
• The ALICE framework provides a structured mnemonic for categorising accounts and applying consistent double-entry bookkeeping rules.
• Every financial transaction must impact at least two accounts with equal and opposite debit and credit entries.
• Educational professionals use these standardised rules to provide a foundational understanding of financial reporting and ledger management.

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Increase and decrease: To have or not to have

ALICE accounts fluctuate consistently throughout an accounting period and it is necessary to know what it means for them to have an increase and decrease in balance. When recording an increase and decrease, the asset and expense accounts are treated differently from the liabilities, income and capital accounts.

Debit increase in assets and expenses

When assets and expenses increase, the accounts are debited or posted on the left side of the T accounts because the business has the item. If the business owns a building, the asset account called Building is debited with the cost. This means that the business has a building to run its operations.

If the business receives money from a loan, sale of a product or the owner’s savings, the asset account called Cash is debited with the amount. This means that the business has cash in hand to spend.

If the business does not own a building but rents one, then the expense account called Rent is debited or the amount is recorded on the left side of the T account. This shows an increase in rented space or that the business has space to operate.

Similarly, if the business buys goods for resale, the entry will be recorded on the debit side or the left side of the expense account called Purchases. This shows an increase in it or that the business has more goods for resale that came into the business.

Credit decrease in assets and expenses

If the business sells the building, then the asset account called Building is credited or recorded on the right side of the T account. This shows a decrease in the building that the business does not have anymore.

Similarly, if the business spends cash which is an asset account, then the Cash account will decrease. The amount is posted on the right side of the T account called Cash. This shows a decrease in cash that the business does not have anymore.

As for expenses, it is possible for the business to pay a landlord rent for a period and then change plans about using the space. The expense account called Rent which has a debit balance will be credited or recorded on the right side of the T account with the same amount. This shows a decrease in the Rent account that the business does not have access to anymore.

However, when goods for resale are purchased, the returns of goods to suppliers is handled differently. Instead of doing a credit entry in the expense account called Purchases, an income account called Returns outwards is credited or the amount is posted on the right side of the T account. In the Income Statement, the Purchases figure takes away the Returns outwards figure to clearly show the decrease in Purchases.

Credit increase in liabilities, income and capital

When liabilities, income and capital increase, the accounts are credited or posted on the right side of the T accounts. This is because the person or business providing the item does not have the item anymore.

If the business takes a loan from the bank, then the liability account called Bank Loan is credited or the amount is posted on the right side of the T account. If the business takes out another loan then the Bank Loan figure will increase. This shows that the bank does not have the money anymore.

The same goes for the income account. If the business sells goods, the income account called Sales is credited or the amount is posted on the right side of the T account. If the business sells more goods, then the Sales figure will increase. This shows that the warehouse or the shelf of the business does not have the product anymore.

Lastly, the capital account has a similar effect. If the owner invests money into the business, it is recorded as a credit balance or on the right side of the T account called Capital. If the owner spends more money out of his own pocket to do something for the business, then the Capital figure will increase. This shows that the owner of the business does not have the money in his pocket anymore.

Debit decrease in liabilities, income and capital

A liability account is debited when it decreases. If the business pays off the bank loan, the liability account called Bank Loan is debited or the amount is posted on the left side of the T account.

By recording the amount on the left side of the Liability account, it shows that there is a decrease in the loan. Another way to look at it is the bank has the money so the entry is on the left side. It is a decrease because the business owes the bank less money.

An income account is debited when it decreases. The handling of returns of sales is similar to the returns of purchases.

If the customer returns the goods, then an expense account called Returns inwards will record the amount of the goods returned on the debit or left side of the T account. In the Income Statement, the figure Sales takes away the Returns inwards figure to present the Net Sales. It is a decrease because the business sold less goods.

A capital account is debited when it decreases. Similar to the handling of returns which occurs outside of the T accounts, if the owner withdraws money from the business for his personal use, then an account called Drawings is used.

A debit entry is made or the amount is recorded on the left side of the T account. This shows that the owner took out money that he had put into the business. This entry shows a decrease in the Capital amount in the Balance Sheet as the Capital figure takes away Drawings.

Understanding the ALICE framework

The ALICE acronym serves as a foundational pillar for students and professionals entering the field of Principles of Accounts (POA). It organises the vast array of business transactions into manageable categories, each governed by specific mathematical and directional rules. By identifying whether an account is an Asset, Liability, Income, Capital, or Expense, a bookkeeper can instantly determine the appropriate recording method.

Assets (A)

Assets represent the resources a business owns or controls that carry future economic value. Common examples include cash, bank balances, inventory, machinery, and accounts receivable.

Increase: Recorded as a Debit. When a business acquires a new vehicle or receives cash, the asset account is debited.

Decrease: Recorded as a Credit. When cash is spent or an old piece of equipment is sold, the asset account is credited.

Liabilities (L)

Liabilities are the obligations or debts that a business owes to external parties. These include bank loans, mortgages, and accounts payable to suppliers.

Increase: Recorded as a Credit. Taking out a new loan increases the amount owed, necessitating a credit entry.

Decrease: Recorded as a Debit. Paying off a debt reduces the liability, which is recorded as a debit.

Income (I)

Income, or revenue, refers to the earnings generated through the primary operations of the business, such as sales or services rendered.

Increase: Recorded as a Credit. Every sale made increases the total income of the company.

Decrease: Recorded as a Debit. While rare, income may be decreased via sales returns or adjustments.

Capital (C)

Capital represents the owner’s equity or the investment made into the business by its proprietors. It is the internal claim on the assets of the business.

Increase: Recorded as a Credit. When an owner invests more personal funds into the business, capital increases.

Decrease: Recorded as a Debit. If an owner withdraws funds for personal use (drawings), the capital account is debited.

Expenses (E)

Expenses are the costs incurred during the process of earning income. These include rent, salaries, electricity, and advertising costs.

Increase: Recorded as a Debit. Paying for monthly utilities increases the total expenses for that period.

Decrease: Recorded as a Credit. Expenses are credited only in specific circumstances, such as the correction of an error or a refund.

In the financial records of a business, the liabilities, income and capital accounts are responsible for the business having assets and expenses to function.

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Practical application of ALICE rules

In the financial records of a business, the liabilities, income, and capital accounts are responsible for providing the resources that allow the business to acquire assets and incur expenses to function.

Debit increases: Assets and Expenses

When assets and expenses increase, the accounts are debited or posted on the left side of the T-account. This indicates the business has acquired the item or benefit. For example, if a business receives money from a loan, the asset account called Cash is debited. This shows the business now has liquid funds available for operations. Similarly, if a business pays for a warehouse, the expense account called Rent is debited, showing an increase in the space available for business activities.

Credit increases: Liabilities, Income, and Capital

When liabilities, income, and capital increase, the accounts are credited or posted on the right side of the T-account. This reflects the source of the value moving into the business. For instance, if a business takes a loan from a bank, the liability account called Bank Loan is credited. This records the increase in the obligation to the bank. Likewise, when the owner invests personal savings into the company, the Capital account is credited to reflect the increase in the owner’s stake in the business.

Managing decreases in accounts

Correctly recording a decrease is just as vital as recording an increase to maintain an accurate trial balance.

Credit decreases: Assets and Expenses

If a business sells an asset, such as a company vehicle, the asset account is credited. This entry reflects that the business no longer possesses that specific resource. For expenses, decreases are less common but occur during adjustments or refunds. For example, if a business overpays for insurance and receives a refund, the expense account may be credited to reflect the reduced cost.

Debit decreases: Liabilities, Income, and Capital

A liability account is debited when it decreases, such as when the business pays off a portion of its bank loan. This entry shows that the amount owed to external parties has been reduced. For income, a decrease might be recorded when a customer returns goods. In this case, rather than debiting the Sales account directly, a contra-income account called Returns Inwards is often debited to provide clearer financial reporting.

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