T Accounts Guide
A guide to understanding T Accounts
A guide to understanding T Accounts
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 that looks like a “T” so that all additions and subtractions (debits and credits) to the account can be easily tracked and represented visually.
Each separate account will have its own individual T Account. A typical T Account looks like the following:
When most people hear the term debits and credits, they think of debit cards and credit cards. Debit cards refer to straight up cash payments while credit cards are a form of borrowing. In accounting, however, debits and credits refer to completely different things.
Debits and Credits are simply accounting jargon that can be traced back hundreds of years and that is 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.
These entries are recorded as journal entries in the company’s books. For more on journal entries, please click on the journal entries link below.
Debits and credits can mean either increasing or decreasing for different accounts, but their T Account representations look the same in terms of left and right positioning in relation to the “T”.
The left side of the T 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.
T Accounts are also used for income statements accounts as well, which include revenues, expenses, gains, and losses.
Once again, debits to revenue/gain decrease the account while credits increase the account. The contrary 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 Accounts, on the correct side, by the correct amount.
For example, if a company issued equity shares for $500,000, the journal entry would be composed of a Debit to Cash and a Credit to Common Shares.
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