A T-account records the financial transactions of a business by employing double-entry bookkeeping. It is an informal term that received the name because of its appearance in the bookkeeping. While entering financial transactions, a big T-shape is drawn, and the “T” is given a title which is entered above the horizontal lines. The vertical line of “T” separates the credit and debit entries. The debit entries are recorded on the left side and credit on the right side.
Another term for T-account is ledger accounts.Highlights
Beginning with the basics of the T-account, the left side will always project the debit entries and the right side will always show the credit entries, irrespective of the type of account.
Debit and credit show either decrease or increase depending upon the account type, but by convention, the side of debit and credit is fixed, that is, left and right sides respectively.
The asset account includes cash and cash equivalents such as accounts receivables, PP&E, inventory, bank and so on. The debit of the asset account (left side) shows the increase in the value of the account, whereas, the credit side shows the fall in the assets account.
The case is different for the shareholder’s equity and liability account, as the debit side of the account projects the decrease in the value and the credit side indicates the increase in the value of the account.
A debit entry in the revenue and gain account indicates the decrease in the value whereas the increase in values is shown by the credit entry. For the losses and expenses account, the debit entry is shown an increase and credit entry shows a decrease.
By using the T-account, it becomes easy for the company to track the entries that have been entered during a specific duration. All the journal entries are recorded in the T-account with the correct amount and on the correct side.
T-accounts are utilized by the accountants and the bookkeepers for ascertaining the right journal entry for any transaction. Using T-accounts is useful in the following cases:
While teaching bookkeeping and accounting – It is generally difficult for a beginner to understand the accounting principles. T-account solves the issue by adding ease in learning the accounting principles, especially in those cases, when the learner is unable to grab the concept of debt and credit across different accounts of balance sheet and income statements.
While learning to account – The accounting principles can be easily learned with the help of the T-account concept. T-account usage in recording the business transaction is helpful for those accountants who desire to track the transactions and gain a better understanding of the credit and debit. However, presently a range of software are available that records business transactions.
Solves the issue of recording complicated business transactions – With T-accounts, the users can assess the process or reason for making a specific entry that is recorded on a spreadsheet or any other software. T-account also adds ease in tracking the transactions and understanding the effect of the entry on financial statements. Moreover, T-account is highly useful in avoiding any error related to making entries.
The ledger can be described as a financial account that is set whereas the T-account presents the ledger account graphically. This makes the ledger and T-account different from each other.
To highlight the difference, it can be stated that the ledger is a collection of T-accounts. To understand the whole accounting process, it is crucial that accountants or bookkeepers have strong knowledge about both T-account and ledgers. With the advent of the internet, there is a range of accounting software that helps in the creation of ledger and T-accounts in a convenient and cost effective manner.
Adjusting entries are usually prepared by employing T-accounts. As per the accrual accounting principle, the company’s expenses should always meet the company’s revenues during the specific duration. T-accounts act as a guide for the bookkeepers and accountants to ascertain what entry will be made in the ledgers and how balance in the revenues and expenses would be achieved.
Business owners can also take advantage of T-accounts for extracting information regarding the transaction and its nature that took place on a specific date along with the movement within different accounts.