Learning debits and credits with ALICE

Here is a great way to learn (and remember) debits and credits in accounting. We use an acronym called ALICE.

Write ALICE vertically in the middle of a page.

A

L

I

C

E

Above and to the left of the A write in DR (represents Debit) and on the right a CR (you got it Credit)

DR            CR

A

L

I

C

E

A represents Assets

L represents Liabilities

I represents Income

C represents Capital

E represents Expenses

Now put a + on the left beside A and a + on the left by the E, fill in the rest of the left hand side with -'s.

DR         CR

+ A

- L

- I

- C

+ E

On the right hand side put the opposite sign.

DR        CR

+ A -

- L +

- I +

- C +

+ E -

You now have an easy method to remember debits and credits based on this diagram.

For example: Company A sells $1,000 of services to a customer for cash. (ignore the government tax grab)

Step 1. Analyze transaction: the accounts affected and whether the balance in the account would be increasing or decreasing.

Accounts affected are: Cash (an Asset) increases and Service Revenue (an Income) increases, (Note the terms income, revenue, sales all represent income depending on the type of business you are in. Typically retail businesses use Sales, service type businesses use Revenue.)

Step 2. Refer to the diagram:

The + sign indicates how to increase a balance in that class. Therefore an increase in an Asset account Cash is going to be a DR, an increase in an Income account Service Revenue is going to be a CR.

Your entry will look like this:

                                                    DR           CR

Cash                                                              1,000

Service Revenue                                                          1,000

To record service revenue.

Try another one:

Company A buys $10,000 of equipment with the total balance payable (due) in 30 days.

Step 1: analyze the transaction

Accounts affected are Equipment (an Asset), and Accounts Payable (a Liability)

Equipment is increasing by 10,000, Accounts Payable is increasing by 10,000

Step 2: refer to the ALICE diagram

To increase the Asset account Equipment we require a (see the + on the A in the diagram) DR

To increase the Liability account Accounts Payable we require (see the + on the L) CR

Entry required is:

                                                   DR               CR

Equipment                                                   10,000

Accounts Payable                                                            10,000

Record equipment purchase, balance due in 30 days.

The trick is to know the class of accounts being affected. Spend your time learning what accounts are included in Assets, Liabilities, Income, Capital and Expense classifications and the mechanics of Dr and Cr are as simple as the diagram above. One last thing, if you are using Withdrawals in a Sole Proprietorship or Partnership they are recoded the same way as expenses, a debit to increase and a credit to decrease.

Good luck....keep your balance...in life and in the classroom....oh yeah, if it doesn't balance in accounting...it just isn't right...your DEBITS ALWAYS have to EQUAL your CREDITS