T-Account

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:

Example of a T-account, with debits on the left and credits on the right

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 in a T-account. 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 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 to show an increase in its asset account and a corresponding increase in its equity account:

An example of a T-account recording assets and equity

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.