T-Account
What is a T-Account?
A T-account is a casual term for a set of financial records that uses [double-entry bookkeeping](/twofold entry). The term portrays the presence of the bookkeeping entries. First, a large letter T is drawn on a page. The title of the account is then entered just over the top horizontal line, while underneath debits are listed on the left and credits are recorded on the right, separated by the vertical line of the letter T.
A T-account is likewise called a ledger account.
Understanding T-Account
In [double-entry bookkeeping](/twofold entry), a boundless accounting method, all financial transactions are considered to affect at least two of a company's accounts. One account will get a debit entry, while the second will get a credit entry to record every transaction that happens.
The credits and debits are recorded in a general ledger, where all account balances must match. The visual appearance of the ledger journal of individual accounts resembles a T-shape, consequently why a ledger account is likewise called a T-account.
A T-account is the graphical representation of an overall ledger that records a business' transactions. It consists of the accompanying:
- An account title at the top horizontal line of the T
- A debit side on the left
- A credit side on the right
Illustration of T-Account
If Barnes and Noble Inc. sold $20,000 worth of books, it will debit its cash account $20,000 and credit its books or inventory account $20,000. This twofold entry system shows that the company presently has $20,000 more in cash and a comparing $20,000 less in inventory on its books. The T-account will seem to be this:
T-Account Recording
For different accounts, debits and credits might translate to increases or decreases, but the debit side must constantly mislead the left of the T outline and the credit entries must be recorded on the right side. The major components of the balance sheet — assets, liabilities and shareholders' equity (SE) — can be reflected in a T-account after any financial transaction happens.
The debit entry of an asset account translates to an increase to the account, while the right half of the asset T-account represents a decrease to the account. This means that a business that gets cash, for instance, will debit the asset account, but will credit the account in the event that it pays out cash.
The liability and shareholders' equity (SE) in a T-account have entries on the left to reflect a decrease to the accounts and any credit means an increase to the accounts. A company that issues shares worth $100,000 will have its T-account show an increase in its asset account and a comparing increase in its equity account:
T-accounts can likewise be used to record changes to the income statement, where accounts can be set up for revenues (profits) and expenses (losses) of a firm. For the revenue accounts, debit entries decrease the account, while a credit record increases the account. Then again, a debit increases an expense account, and a credit decreases it.
T-Account Advantages
T-accounts are generally used to prepare adjusting entries. The matching principle in accrual accounting states that all expenses must match with revenues generated during the period. The T-account guides accountants on what to enter in a ledger to get an adjusting balance so revenues equivalent expenses.
A business owner can likewise use T-accounts to extract information, like the nature of a transaction that happened on a particular day or the balance and movements of each account.
Highlights
- A T-account is a casual term for a set of financial records that use twofold entry bookkeeping.
- The account title shows up just over the T. Underneath, debits are listed on the left and credits are recorded on the right, separated by a line.
- The T-account guides accountants on what to enter in a ledger to get an adjusting balance so revenues equivalent expenses.
- It is called a T-account because the bookkeeping entries are spread out in a manner that resembles a T-shape.
