A t-account refers to the simplest form of an account. It contains the most basic parts of an account which are: account title, a debit side, and a credit side.
Parts of a T-account
A "t-account" is made up of the three most basic parts of an account which are: account title at the top, a debit side (left), and a credit side (right). It looks like a big letter "T" hence the term "t-account"
Using a T-account
Ledger accounts are used in conjunction with a journal. The entries in the journal are simply transferred to the ledger. For example, if the first journal entry includes a debit to Cash in Bank for $100,000, the accountant (or the accounting software) will transfer that to the Cash in Bank account in the ledger by placing 100,000 on the debit side or left side (since it was debited in the journal). All entries in the journal must be posted to the ledger.
Though the t-account is sufficient in the posting process, most accounting systems use more detailed form of accounts. And even though automated accounting systems use the same theory behind the posting process, some do not show the inner workings of accounts in their interface.
The t-account is often used as a useful tool for accountants and students in analyzing company accounts or in solving accounting problems. to be effective, one must know the concepts behind and how to use debits and credits.
To increase asset accounts, they are debited. To increase liability and capital accounts, they are credited. To increase revenue accounts, they are credited. To increase expenses and withdrawals, they are credited. Placing an amount on the opposite side decreases the account.
Use the following transaction and t-account to determine the balance of Accounts Receivable.
- ABC Company had accounts receivable of $120,000 at the beginning of the year.
- During the year, it made sales on account amounting to $200,000.
- The company was able to collect $220,000 of customers' accounts.
- ABC wrote-off $10,000 after concluding that they are un-collectible.
All increases to Accounts Receivable are placed on the debit side (since it is an asset account). All decreases are placed on the credit side. Total debits amount to $320,000 while total credits amount to $230,000. Therefore, accounts receivable has a debit balance of $90,000.
Use the following transaction and t-account to determine the balance of Accounts Payable.
- ABC Company had accounts payable of $110,000 at the beginning of the year.
- During the year, it made credit purchases amounting to $80,000.
- The company paid $150,000 ($100,000 on cash purchases, $50,000 on credit purchases).
Liabilities normally have credit balances. Since Accounts Payable are liabilities, all increases are place on the credit side while all decreases are place on the debit side. Total debits amount to $190,000 while total credits amount to $50,000. The balance of Accounts Payable is computed by getting the difference which is equal to $170,000.