What is a T-Account
A T-account is an informal term for a set of financial records that use double-entry bookkeeping. The term T-account describes the appearance of the bookkeeping entries. If a large letter T were drawn on the page, the account title would appear just above the T, debits would be listed under the top line of the T on the left side and the credits would be listed under the top line of the T on the right side, with the middle line separating the debits from the credits.
A T-account is also called a ledger account.
BREAKING DOWN T-Account
In double-entry bookkeeping, a widespread accounting method, all financial transactions are considered to affect at least two of a company's accounts. One account will get a debit entry, while the second will get a credit entry to record each transaction that occurs. The credits and debits are recorded in a general ledger where all account balances must match. The visual outlook of the ledger journal of individual accounts resembles a T-shape, hence, a ledger account is also called a T-account.
A T-account is the graphical representation of a general ledger that records a business’ transactions. In effect, all T-accounts in a business fall under the general ledger. The T-account has three elements — an account title at the top horizontal line of the T, a debit side, and a credit side. For example, if Barnes & Noble sold $20,000 worth of books, it will debit its cash account $20,000 and credit its books or inventory account $20,000. This double-entry system shows that the company now has $20,000 more in cash and a corresponding $20,000 less in its inventory of books. The T-account will look like this:
For different accounts, debits and credits may translate to increases or decreases, but the debit side must always lie to the left of the T outline and the credit entries must be recorded on the right side. The major components of the balance sheet — assets, liabilities and shareholders’ equity — can be reflected in a T-account after any financial transaction occurs. The debit entry of an asset account translates to an increase to the account, while the right side of the asset T-account represents a decrease to the account. This means that a business that receives cash, for example, will debit the asset account, but will credit the account if it pays out cash. The liability and shareholders’ equity in a T-account have entries on the left to reflect a decrease to the accounts and any credit signifies an increase to the accounts. A company that issues shares worth $100,000 will have its T-account show an increase in its asset account and a corresponding increase in its equity account:
T-accounts can also be used to record changes to the income statement where accounts can be set up for revenues (profits) and expenses (losses) of a firm. For the revenue accounts, debit entries decrease the account, while a credit record increases the account. On the other hand, a debit increases an expense account, and a credit decreases it.
T-accounts are commonly used to prepare adjusting entries. The matching principle in accounting states that all expenses must match with revenues generated during the period. The T-account guides accountants on what to enter in a ledger to get an adjusting balance so that revenues equal expenses. A business owner can also use T-accounts to extract information, such as the nature of transaction that occurred on a particular day or the balance and movements of each account.