If you want a career in accounting, T Accounts may be your new best friend. The T Account is a visual representation of individual accounts in the form of a “T,” making it so that all additions and subtractions (debits and credits) to the account can be easily tracked and represented visually.
Each account will have its own individual T Account, which looks like the following:
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Debits and Credits for T Accounts
When most people hear the term debits and credits, they think of debit cards and credit cards. In accounting, however, debits and credits refer to completely different things.
Debits and Credits are simply accounting terminologies that can be traced back hundreds of years, which are still used in today’s double-entry accounting system. A double-entry accounting system means that every transaction that a company makes is recorded in at least two accounts, where one account gets a “debit” entry while another account gets a “credit” entry.
The left side of the Account is always the debit side and the right side is always the credit side, no matter what the account is.
For different accounts, debits and credits can mean either an increase or a decrease, but in a T Account, the debit is always on the left side and credit on the right side, by convention.
Let’s take a more in-depth look at the T accounts for different accounts namely, assets, liabilities, and shareholder’s equity, the major components of the balance sheet or statement of financial position.
For asset accounts, which include cash, accounts receivable, inventory, PP&E, and others, the left side of the T Account (debit side) is always an increase to the account. The right side (credit side) is conversely, a decrease to the asset account. For liabilities and equity accounts, however, debits always signify a decrease to the account, while credits always signify an increase to the account.
Once again, debits to revenue/gain decrease the account while credits increase the account. The opposite is true for expenses and losses. Putting all the accounts together, we can examine the following.
Using T Accounts, tracking multiple journal entries within a certain period of time becomes much easier. Every journal entry is posted to its respective T Account, on the correct side, by the correct amount.