Increase and decrease of ALICE accounts

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

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.

Increase and decrease: To have or not to have

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.