T accounts are awesome! T accounts are the most useful tool in accounting. T accounts are fundamental to your understanding of accounting. T accounts are helpful in solving any accounting problem. T accounts are spectacular! OK, that’s enough praise for T accounts. Let’s get to work. How do you master T accounts? By taking four simple steps. Stay with me, and let’s get this done! Here’s a very simple definition of a T account: a T account is a visual representation of an account, to think through the journal entries you are going to make to record transactions.
T accounting step one: Take a piece of paper and draw a capital “T”. Now write: debits on the left, credits on the right. This is something you need to memorize. Repeat it to yourself fifty times per day, put post it notes all over your house, or even better: download the Finance Storyteller lockscreen wallpaper image for your phone from , so you can repeat “debits on the left, credits on the rights” every single time you pick up your phone.
T accounting step two: take a look at this T account and this balance sheet. Looks pretty similar, right? That’s because it’s the same basic idea. Debits on the left, credits on the right.
Asset accounts in their “natural state” have a debit balance, liabilities and equity accounts in their “natural state” have a credit balance. You can think of a T account as a mini balance sheet, for one specific account in the ledger.
Assets go up if you add debits, and down if you book credits. Liabilities and equity go up if you add credits, and down if you book debits.
Here’s a little secret shortcut that very few people realize: the two types of income statement accounts revenue and expense are essentially just a subset of equity. Revenue accounts in their “natural state” have a credit balance, at the end of the accounting period they will roll up into equity and make it grow. Expense accounts in their “natural state” have a debit balance, at the end of the accounting period they will roll up into equity and make it shrink. If revenue is higher than expenses, you generate a positive net income, which adds to the equity balance.
T accounting step three: for every journal entry that you want to visualize with T accounts, decide first which type of account you need (asset, liability, equity, revenue, expense), and then which specific account in that category. Let’s take an example with accounts and numbers from the “income statement versus balance sheet” video (that I encourage you to watch first ) to work through some T account examples.
T accounting step four: Let’s see what the T account for cash looks like at the end of the period. We started with two hundred thousand dollars opening balance (after the company attracted funding), then credited cash when buying fixed assets by one hundred thousand dollars, and credited cash when paying the interest to the bank by ten thousand dollars. So the ending balance for cash is ninety thousand dollars debit balance: 200 minus 100 minus 10. Do this for each of your T accounts, and you can then proceed to make a trial balance: a listing of all general ledger accounts along with their respective debit or credit balances for the period. Trial balance explained:
T accounting in four steps:
1) Debits on the left, credits on the right
2) A T account is like a mini balance sheet, for one specific account in the ledger
3) For every journal entry, decide first which type of account you need, and then which specific account in that category
4) To calculate the ending balance for an account, add up the opening balance and the debits and credits for the period.
Philip de Vroe (The Finance Storyteller) aims to make strategy, #finance and leadership enjoyable and easier to understand. Learn the business and #accounting vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better investing decisions. Philip delivers #financetraining in various formats: YouTube videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!
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