Small business owners, accountants, or bookkeepers accustomed to double-entry-style accounting use this tool, which can serve as a powerful graphic aid to ensure accounts balance out. Whether you’re doing manual or electronic accounting for your small business, you should make T-accounts a habit to double-check your financial standing. Below, we’ll delve further into how this accounting tool works.
Definition and Example of T-Accounts
A T-account is a graphic representation of the accounts in your general ledger. The resulting charts are formed in a “T” shape, giving meaning to its name. T-accounts have the account name listed above the T, and the debits and credits make up the left and right sides, respectively.
Alternate name: ledger account
T-accounts are often used by small business owners because they make it easier to understand double-entry accounting. A single transaction affects two accounts when using this accounting method: a debit of one account and a credit of another simultaneously. A T-account makes it clear that a debit somewhere must lead to a credit elsewhere to balance out. As a small business owner, you need to understand how your general ledger maintains balance. This general ledger contains the full list of every transaction that occurs in your business. It’s possible you may not be able to make sense of endless rows of transaction details and can miss where an imbalance occurs. For example, purchasing new inventory for your business would increase your assets while decreasing your cash. An error in that particular accounting could mean a higher cash balance than what actually is available.
How a T-Account Works
A T-account works by showing how a transaction creates an increase and decrease in two separate accounts. This informs that you have a balanced account in your general ledger or that an error has occurred in the accounting process. Debits always exist on the left side of the T, whereas credits always appear on the right side. However, the type of account dictates whether a debit or credit is an increase or decrease. To understand this clearly:
A debit is an increase in an asset or expenses account.A credit is a decrease in an asset or expenses account.A credit is an increase in a liabilities, revenue, or equity account.A debit is a decrease in a liabilities, revenue, or equity account.
Let’s say you bought $1,000 worth of inventory to sell to future customers. Using the double-entry accounting method, you know this transaction has affected two accounts. Your inventory (asset) account has increased or been credited by $1,000, and your cash (asset) account has decreased or been credited by $1,000 because you have decreased available inventory. A T-account representation of this would look as follows: Regardless of your method, T-accounts are great ways to understand how transactions affect various financial statements created from the general ledger.
