A T-account is a visual structure shaped in the letter T that shows the transactions of an account represented in a company’s general ledger. A T-account consists of a left side and right side, and the name of the account sits at the top of a T-account. The left side of a T-account represents a debit and the right side a credit. A T-account allows an accounting professional to manually calculate the balance of a specific account in a quick and efficient manner. Small business accounting personnel and business owners should understand how T-accounts work and their importance to maintaining accurate financial records.
Understanding a T-Account
You can use a T-account to determine the correct balance for a specific account or the amount needed to arrive at a certain balance. T-accounts also are useful when recording adjusting entries, which include accruals and deferrals made at the end of a period. Each type of account listed in a general ledger carries a normal balance of a debit or credit. After all transactions are entered into the appropriate T-accounts, the total amount of debits made to all of the T-accounts should equal the total amount of credits made to all of the T-accounts. If the total amount of debits and credits do not balance, you should recheck all of the transactions to verify that you entered the amounts correctly.
A T-account uses double entry accounting by placing the transaction amount in the debit column of one T-account and in the credit column of a corresponding T-account. For example, if a company sells a product to a customer for $1,000 cash, the bookkeeper must make an entry in two separate T-accounts. A debit entry for $1,000 is added to the left side of the cash T-account, and a credit entry is added to the right side of the revenue T-account. Most small businesses implement double-entry accounting because of the advantages the system offers. Double-entry accounting allows you to prepare accurate financial statements because transactions are recorded to asset and liability accounts. Double-entry accounting also gives you the ability to draw a trial balance to verify that transactions are accurately recorded.
A debit means that an accounting entry is entered on the left side of an account. Debits increase the value of accounts that carry normal debit balances. Accounts that increase due to a debit include dividends, expenses, assets and losses. For example, when a company sells a product on credit to a customer, a bookkeeper debits the accounts receivable account. The accounts receivable account is an asset, and the debit increases the total value of the account. A credit decreases the value of accounts that carry normal debit balances. Continuing with the example, when the customer pays his bill for the products purchased, the bookkeeper credits the accounts receivable account to reflect the payment received and decrease the value of the account.
A credit represents an accounting entry entered on the right side of an account. Credits increase the balance of accounts that normally carry credit balances. Accounts with normal credit balances include gains, income, revenue, liabilities and stockholders’ or owners’ equity. A debit decreases the balance of these accounts. For example, when a company buys a product from a vendor on credit, a bookkeeper records a credit to the company’s accounts payable account to reflect the liability. When the company pays its invoice for the product purchased on credit, the bookkeeper debits the accounts payable account to reflect that the company paid its liability.