T Account - Explained
What is a T Account?
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Table of ContentsWhat is a T-Account?How is the T-Account Used?Related Topics
What is a T-Account?
Financial reports that use the double-entry bookkeeping method are referred to as T-Account informally. The appearance of the book keeping entries resembles the letter T, hence the moniker. Its a ledger account that has the account title at the top, debits on the left, credits on the right while a middle line separates the two columns, resembling a large T drawn on the page.
How is the T-Account Used?
Double-entry bookkeeping is a widely used ledger recording method to account for a firms financial transactions. Each account in the ledger gets two entries, a debit and a credit, that must balance each other out. This gives the account entries the appearance of a T, hence the informal term T-Account is sometimes used to refer to these ledgers.
All T- Accounts are considered part of the general accounting ledgers of a firm. Lets look at an example of a sample entry in a T-account with the help of the purchases and expenditures of Macys. Suppose Macys sold Christmas hangings worth $30,000. Its cash account will be debited with $30,000 while its inventory account for Seasonal Decorations will be credited with $30,000. This entry is read as the sale of goods worth $30,000 and the deduction of goods worth $30,000 from the inventory. This is how it appears in the ledger:
Seasonal Decorations Account
Debit | Credit
$30,000 | $30,000
This is the standard way of recording financial statements in the double bookkeeping method. Debits always to the left, credits always to the right. Debits signify increase in funds whilst credits signify deductions in the account. When taken together with all the transactions over a specific period, the ledger clearly reflects the total assets, liabilities, and shareholder equity in the financial record. Another example of T-Accounts is in the accounting of equity sales. If a company sells shares worth $1000, the T-Accounts will show an increase of $1000 in the assets column and a corresponding decrease of $1000 in the equities column. Income statements and revenue accounts can also be recorded as T-Accounts. They follow the matching principle in accounting that states that the revenues generated must match the expenses during a given period. Adjustments entries are frequently made to make up the differences. T-Accounts also help business owners track expenditures, natures of deals, and movement of cash.
What are the Rules for Using T Accounts?
A T-Account is actually representation of the account. More specifically, a T account represents a ledger account.
Recall, that the T-Account is used to show the effects of a transaction. It tells us where if these accounts are going up or down with a transaction.
The T across the top is where the account name goes. If you're dealing with "cash" or "accounts receivable" for example, then that name would go there. Each major account category gets its own T table (each individual item within that category does not).
We have two sides. On the left side of the T table, under the account name, that's what we call the debit side (abbreviated dr). The right side is what we call credit (abbreviated cr). At its basis debit simply means left side; credit simply means right side. It doesn't mean plus or minus.
The difference between the two sides or the difference between the total debits and the total credits. This is what we call our account balance. It includes the beginning balance
When you do your account balance, the balance itself should go on what's called the "normal side".