My Career Long Relationship with ALICE

by Doug Lamm

Now that I am retired, I have a little more time to “ponder” points along the meandering path of my career.

Like many college students, I worked to earn the money to pay for college myself.  In addition to helping local farmers and my grandparents and folks on our place, I was fortunate to work during summer and winter breaks for the local sawmill, taking every “overtime paying” double shift or holiday shift they would offer me.  I looked forward to each pay day and taking that check to the bank and watching the balance stack up.

One thing I always noticed was the statement wording that the bank had CREDITED my account for the deposit I made to my savings account.  That was a good term because it meant that my bank account had increased!

Fast forward to my first college intro to accounting course.  The class was required for all business majors and I had just switched majors to business.  

The class, wisely enough, was taught by a non-accountant, our Marketing, Business management and Business Law teacher, Hal Weber.  He taught us the big picture of what the function of accounting in business did, how the data was used, why it was important, and how it helped business owners make informed business decisions.  That all made sense, kind of…

At one point, Professor Weber introduced the concept of double entry accounting, which was created in the late 1200’s by Italian merchants and further developed in the late 1400’s by a Franciscan friar Luca Pacioli.  (Italian friar – and you wonder why accountants get labeled…)

Like many young students, the concept didn’t make sense to me and I was confused by the various uses and rules for when a debit was used or a credit was used.  And my most frustrating conundrum started with my favorite wording on my bank statement – “we credited your account”.

I knew that when my bank account in the bank increased, it was because they had credited my account.  Conversely, I knew that when I wrote a check or took a cash withdrawal, the statement wording was that the bank had debited my account.

Now, some college professor is telling me that my bank account is an asset – i agreed – but that an increase in my bank account was a debit on my accounting system for my business or life.  Conversely, if I purchased something, the money coming out of my account was a credit in the accounting system for my bank account.  That just seemed all bassackwards!

Those of you who know me well are not surprised that I expressed that sentiment to Prof Weber, using my personal bank statement as my evidence.  Sometimes the brightest light shines during the darkest moments!

Prof Weber then told us that he was going to introduce us to his friend Alice.  I had gone to school all 12 years with a friend named Alice so, that sounded fine to me.

He wrote the following on the chalk board:

Ok, so something more is going on here.

He then filled in the rest of the chalk board as noted below.

He went on with the “rest of the story” and explained that

1. Each business or entity has their own set of accounts and these rules apply to their business accounts
2. “the first and last are debits and the rest are credits”
3. These represent the increases in those accounts or the normal resting state of their balance
4. Decreases in those accounts are the opposite

He then went on to answer my question about the bank and why they showed my deposits to their bank as credits to my account. 

He started with the question – what type of account is your bank account on the bank’s books?  Answer – after I thought about it a while – well it is MY money, not theirs and they are holding it for me, so I guess it is a Liability.  Bingo!  When I put my money into their bank, they take my money and put it into their bank account – an asset, as a debit and they then credit their liability account owed to me for the same figure.  The debit and the credit balance out to zero and the transaction is complete.  Hmmmm. 

So, on my books, I received payment for my work, so that is income.  I put it in my bank account, which is an asset.  So, I debit my bank account on my books and I credit my income account.  And it all started to make sense.  And in a bigger picture sense, the bank’s credit to my account equaled my debit to my account, so maybe the whole world can be in balance…..

As I worked through a few more examples, the double entry accounting system began to make more and more sense to me.  That is the basis for understanding the complete world of accounting theory and why I can look at a balance sheet or set of financial transactions and recognize when something is “out of sorts”. 

When our son Joel, who told me at age 8 that he would never be an accountant because it was a life sentence to math, took intro to accounting in his business courses in college, I taught him about ALICE.  I saw him write that on the top of all of his homework assignments and before long, he had it down very well and aced his classes in a subject he thought was horrible and boring, but easy.  Easy because he knew ALICE!!

Over the years, I have introduced many staff accountants and client bookkeepers to my “college girlfriend ALICE”.  The concept makes sense fairly quickly as you work through a few examples and I have only met one other accountant who got taught about ALICE their freshman year, my long time friend, college classmate and partner in the business, Terry Ivey.  I think it needs to be in every intro to accounting text book and in every accountant’s office.  It sure beats the old story of the accountant who, every day after entering his office, locked his office door and went to his locked drawer and pulled out a sheet that said, “DEBITS ON THE LEFT, CREDITS BY THE WINDOW”.

I hope this little story brightens your day a little and gives you a new perspective on the basics of the double entry accounting system because of my long time friend ALICE!!