T Accounts Guide

It is a colloquial word for a financial record set that uses double-entry accounting. 

A T-account is a colloquial word for a set of financial records that use double-entry accounting. It's termed because the bookkeeping entries are arranged in the shape of a T.

A ledger account is another name for a T-account.

Example
DebitCredit
  

Just below the T is the account title; debits appear on the left, while credits appear on the right, divided by a line. Finally, the total amount balance for each account is shown at the bottom of the account.

It instructs accountants on entering entries into a ledger to achieve an adjusted balance, ensuring that revenues equal expenses. 

To illustrate all accounts affected by an accounting transaction, a group of T-account is usually clustered together.

The account is a crucial instructional tool in double-entry accounting, demonstrating how one side of a transaction is reflected in another account. However, this method is not applicable in single entry accounting since each transaction affects only one account.

Even experienced accountants use T accounts to help them understand more complicated transactions.

Debits and Credits

The terms "Debit" and "Credit," which accountants learn on their first day of accounting class, are significant and often used terminology in the field.

These terms are used in every accounting document, including general ledgers, cash flow statements, trial balances, income statements, and balance sheets.

Whenever the terms debit and credit are heard, most people think of debit cards and credit cards. However, debits and credits have entirely distinct meanings in the accounting world.

Debits and credits are accounting terms that have been used for hundreds of years and are still in use in the double-entry accounting system today.

Every corporation transaction is recorded in at least two accounts, with one account obtaining a "debit entry" and the other receiving a "credit entry" in a double-entry accounting system.

In the company's books, these transactions are documented as journal entries.

For different accounts, debits and credits can signify increasing or decreasing. However, their T account representations seem the same in terms of left and right positions in regard to the "T."

How T-accounts are Recorded

No matter the account, the debit side is always on the left, and the credit side is always on the right.

Debits and credits can represent an increase or decrease in separate accounts, but in a T account, the debit is always on the left side, and the credit is always on the right side, by convention.

Let's take a closer look at these accounts for the primary components of the balance sheet or statement of financial position: assets, liabilities, and shareholder equity.

Asset Account
DebitCredit
(Increase an asset received)(Decrease an asset paid)
Liability/ Equity Account
DebitCredit
(Decrease a liability repaid loan)(Increase a liability borrowed)

Asset account: The left side of the T Account (debit side) is always an increase in the asset accounts, which include cash, accounts receivable, inventories, PP&E, and others. On the other hand, the right side (credit side) represents a decrease in the asset account.

However, for liabilities and equity accounts, debits always represent a drop in the account, whereas credits always represent an increase.

For instance, a corporation that issues $200,000 worth of shares will see an increase in its asset account and a comparable increase in its equity account in its T-account.

Asset Account
ParticularsAmountParticularsAmount
Cash$200,000  
Shareholders Equity
ParticularsAmountParticularsAmount
  Shares$200,000

T-accounts can also be used to track changes to the income statement, which allows for creating accounts for a company's revenues (profits) and expenses (losses).

For revenue accounts, debit entries reduce the account balance, whereas credit entries increase the account balance. A debit, on the other hand, adds to an expense account, while a credit deducts from it.

How is the Income statement used in T Accounts?

T-accounts are also used for income statement accounts to represent revenues, gains, expenses, and losses on the income statement.

Income Statement
Revenue/ GainsExpense/ Loss
Debit IncreaseCredit Decrease

Debits to revenue and gain can reduce the account balance, while credits increase it. On the other hand, expenses and losses are the opposite of it.

These accounts make it considerably easier to keep track of various journal entries over a period of time. Every journal entry is posted to the correct T Account, by the correct amount, on the correct side.

Example

In this article, we shall take the example of Sam, a landlord of Monkey Army, receiving a $20,000 invoice for June rent. The T account indicates that both a $10,000 debit to the rent expense account and a $10,000 credit to the accounts the payable account will occur.

This initial transaction demonstrates that the corporation has established a liability to pay the expense and an expense.

Rent Expense
DebitCredit
DateAmountDateAmount
06/22$20,000  
Accounts Payable Expense
DebitCredit
DateAmountDateAmount
  06/22$20,000
Accounts Payable Expense
DebitCredit
DateAmountDateAmount
06/22$20,000  
Cash Expense
DebitCredit
DateAmountDateAmount
  06/22$20,000
Cash Expense
DebitCredit
DateAmountDateAmount
  06/22$20,00
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Researched and authored by Savan Sabu | LinkedIn

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