What is a T Account?
T Account is a visual presentation of accounting journal entries that are recorded by the company in its general ledger account in such a way that it resembles to shape of alphabet ‘T’ and depicts graphically credit balances on right side of the account and debit balances on the left side of the account.
T Account Format
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. The format of T Account is given below –
- 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.
- It is a useful facet of the double entry accounting methodDouble Entry Accounting MethodDouble Entry Accounting System is an accounting approach which states that each & every business transaction is recorded in at least 2 accounts, i.e., a Debit & a Credit. Furthermore, the number of transactions entered as the debits must be equivalent to that of the credits. read more as it displays how one side of an accounting transactionAccounting TransactionAccounting Transactions are business activities which have a direct monetary effect on the finances of a Company. For example, Apple representing nearly $200 billion in cash & cash equivalents in its balance sheet is an accounting transaction. read more impacts another account, which, in a way, helps simplify more complex transactions.
- As such, a T account is especially useful in the case of a compilation of challenging and complex accounting transactions where the accountant intends to track how the transaction impacts all other parts of the financial statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more.
- It can be helpful in the avoidance of erroneous entries in the accounting systemAccounting SystemAccounting systems are used by organizations to record financial information such as income, expenses, and other accounting activities. They serve as a key tool for monitoring and tracking the company's performance and ensuring the smooth operation of the firm.read more.
You are free to use this image on your website, templates etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: T Accounts (wallstreetmojo.com)
Examples
Let us take an example of T accountsExample Of T AccountsThe T-Account is a visual representation of journal entries that are recorded in the general ledger account. The T-account is named for the way bookkeeping entries are shown, which mimics the shape of the letter T. It graphically represents credits on the right side and debits on the left.read more with the following two transactions-
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. To increase the Cash account, the account is required to be debited since it is an asset account. On the other hand, to increase the ABC’s Notes Payable account, the account is required to be credited since it is a liability 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. 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 accountNotes Payable AccountNotes Payable is a promissory note that records the borrower's written promise to the lender for paying up a certain amount, with interest, by a specified date. read more is expected to be debited since it is a liability account.
The below table presents the general journal entries for the two transactions mentioned in the T accounts above.
Explanation
In a T account, all business transactionsBusiness TransactionsA business transaction is the exchange of goods or services for cash with third parties (such as customers, vendors, etc.). The goods involved have monetary and tangible economic value, which may be recorded and presented in the company's financial statements.read more 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 the identical amount 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 increases 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 accountThe Asset AccountAsset Accounts are one of the categories in the General Ledger Accounts holding all the credit & debit details of a Company’s assets. The examples include Short-Term Investments, Prepaid Expenses, Supplies, Land, equipment, furniture & fixtures etc. read more, 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. In contrast, a credit entry on the right side increases 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:
| Account Type | Debit | Credit |
|---|---|---|
| Asset | Increase | Decrease |
| Liability | Decrease | Increase |
| Shareholder’s Equity | Decrease | Increase |
| Revenue/Gain | Decrease | Increase |
| Expense/Loss | Increase | Decrease |
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, liabilitiesAccounts Of Assets, LiabilitiesWhat makes Assets & Liabilities different is that while the former refers to anything that a Company owns to gain long-term economic benefits, the latter refers to anything that the Company owes to other parties. read more, shareholders’ equity, revenues, and expenses, etc.
#2 – Double Entry Accounting
The double entry accounting method is a fundamental concept that drives contemporary bookkeepingBookkeepingBookkeeping is the day-to-day documentation of a company’s financial transactions. These transactions include purchases, sales, receipts, and payments.read more and accounting techniques. It is built on the fundamental premise that every financial transaction has an equal and opposite impact on at least two different accounts. It is the underlying concept for the accounting equationConcept For The Accounting EquationAccounting Equation is the primary accounting principle stating that a business's total assets are equivalent to the sum of its liabilities & owner’s capital. This is also known as the Balance Sheet Equation & it forms the basis of the double-entry accounting system. read more – Total Assets = Total Liabilities + Shareholders’ Equity.
Recommended Articles
This article has been a guide to T-Account. Here we discuss what T Account along with practical examples and explanation of accounting transactions is. You may also find some useful accounting articles below –
54.4K subscribers
Leave a Reply