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T Accounts

Tags: account

t-account

What is a T Account?

T Account resembles the shape of a “T” and it is the pictorial representation of general ledger account. Inherently, the left side of a T account is the debit side and the right side is the credit side by convention irrespective of the type of account.

However, depending on the type of account debit and credit can mean either an increase or a decrease of value. The name of the account is written above the “T” along with the account number (if available) while the total balance for each “T” account is written at the bottom of the account.

T Account.png 1

  • The shape supports the ease of accounting in such a way that all additions and subtractions to the account can be tracked and represented easily.
  • The T account is a useful facet of the double entry accounting method as it displays how one side of an accounting transaction impacts another account which in a way is useful for simplifying more complex transactions.
  • As such, a T account is especially useful in the case of a compilation of difficult and complex accounting transactions where the accountant intends to track how the transaction impacts all other parts of the financial statements.
  • Use of a T account can be helpful in the avoidance of erroneous entries in the accounting system.

Examples of T Account

Let us take an example to illustrate the use of T accounts with the following two transactions-

T Account Example #1

On January 01, 2018, a company ABC Ltd borrowed $10,000 from a bank:

This transaction will increase ABC’s Cash account by $10,000 and its liability of Notes Payable account will also increase by $10,000. In order to increase the Cash account, the account is required to be debited since it is an asset account. On the other hand, in order to increase the ABC’s Notes Payable account, the account is required to be credited since it is a liability account.

T Account example 1

T Account example 1-1

T Account Example #2

On February 01, 2018, ABC Ltd repaid a bank loan of $5,000:

This transaction will decrease ABC’s Cash account by $5,000 and it’s liability Notes Payable account will also decrease by $5,000. In order to reduce the Cash account, the account is required to be credited since it is an asset account. On the other hand, the Notes Payable account is required to be debited since it is a liability account.

T Account example 1-2

T Account example 1-3

The below table presents the general journal entries for the two transactions mentioned in the T accounts above.

T Account example 1-4

T Account example 1-5

Explanation of the T Account

In a T account, all business transactions impact at least two of the company’s accounts in such a way that if one account gets a debit entry, then another account will get a credit entry of identical amount in order to close each transaction that occurs. For different account types, a debit and a credit may result in an increase or decrease of the account value.

  • For an asset account, a debit entry on the left side results in an increase to the account, while a credit entry on the right side results in a decrease to the account. It implies that a business that receives cash will debit the asset account, while a cash pay-out will credit the account.
  • On the other hand, for a liability account or a shareholders’ equity, a debit entry on the left side results in a decrease to the account, while a credit entry on the right side results in an increase to the account.
  • In revenue/gain account, a debit entry translates in a decrease to the account and a credit entry translates in an increase to the account.
  • On the other hand, in an expense/loss account, a debit entry translates in an increase to the account and a credit entry translates in a decrease to the account.

Putting all the accounts together in a tabular form depicting the impact on each account type:

T Account

Other Important Terms Related to T Account

#1 – General Ledger

A general ledger is a formal representation of a company’s financial statements where the debit account and credit account records are validated with a trial balance. A general ledger offers comprehensive documentation of all financial transactions of the company over a certain period of time. A general ledger is the repository of all account-related information that is required in order to prepare a financial statement. The typical accounts include accounts of assets, liabilities, shareholders’ equity, revenues, and expenses etc.

#2 – Double Entry Accounting

The double entry accounting method is a fundamental concept which drives the contemporary bookkeeping and accounting techniques. It is built on the basic premise that every financial transaction has the equal and opposite impact on at least two different accounts. It is the underlying concept for the equation – Total Assets = Total Liabilities + Shareholders’ Equity.

Recommended Articles

This has been a guide to T-Account. Here we discuss what is T Account along with practical examples and explanation of accounting transactions. You may also find some useful accounting articles below –

The post T Accounts appeared first on Learn Investment Banking: Financial Modeling Training Courses Online.



This post first appeared on Free Investment Banking Tutorials |WallStreetMojo, please read the originial post: here

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