T-Accounts: A Great Tool for Solving Accounting Transactions

T-Accounts Defined

A T-Account is a template or format shaped like a “T” that represents a particular general ledger account. Debit entries are recorded on the left side of the “T” and credit entries are recorded on the right side of the “T”. It is a tool for organizing journal entries and analyzing accounting transactions.

Working with T-Accounts

There are a few business owners or managers who have a fantastic ability to remember details, but I would venture to say that most of us find our memory diminishing over time. T-Accounts come in handy when a series of journal entries are required and it becomes too difficult to keep all of them in your head.

When solving accounting problems, you have to think of accounting transactions in terms of the “accounting model”. Click this link if you need to refresh your memory regarding the accounting model:

http://www.reallifeaccounting.com/accounting_model.asp

The “accounting model” is a template you can use to remember how debits and credits work. The two most common scenarios for using T-Accounts are: 1) determining why certain transactions were previously posted to the general ledger; or, 2) working out the most appropriate place to post certain accounting
transactions.

T-Accounts work because they are visually effective. This means they are simple to understand and usually it is possible to portray all the T-Accounts on one page. Let’s look at a basic accounting transaction and then translate it into T-account form. Assume you sold an accessory to one of your rental inventory assets for $35 cash and deposited the money into the bank. You originally bought the accessory for $20 and put it into inventory until it was sold.

The journal entries for the transaction would look like this:

DESCRIPTION    DEBIT    CREDIT
Cash    35.00    
Sales        35.00
DESCRIPTION    DEBIT    CREDIT
Cost of Goods Sold    20.00    
Inventory        20.00
The T-Accounts would look like this:

Cash
35.00
Sales
35.00
Cost of Goods Sold
20.00
Inventory
 20.00

You can easily see that the debits equal the credits. Let’s look at a more complex accounting transaction. You bought a company van to deliver your rental inventory for $25,000 and you did this by putting $5,000 down and setting up a liability (Notes Payable) for $20,000. You made your first payment of $380, of which $80 was interest, and your first month’s depreciation was $833. To the unfamiliar, these transactions might appear confusing until T-Accounts are used.

Fixed Assets – Van
25,000
Cash
5,000
Notes Payable
20,000
Notes Payable
300
Interest Expense
80
Cash
 380
Depreciation Expense
833
Accumulated Depreciation
 833
 

A critical step is to make sure that the debits equal the credits. If not, you have made a mistake that must be solved. Next, simply put these T-Accounts in journal entry form:

DESCRIPTION    DEBIT    CREDIT
Fixed Assets - Van    25,000    
Cash        5,000
Notes Payable        20,000
DESCRIPTION    DEBIT    CREDIT
Notes Payable    300    
Interest Expense    80    
Cash        380